A Survival Guide for Buying a Home
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A Survival Guide for Buying a Home
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A Survival Guide for Buying a Home Sid Davis
American Management Association New York • Atlanta • Brussels • Chicago • Mexico City San Francisco • Shanghai • Tokyo • Toronto • Washington, D.C.
Special discounts on bulk quantities of AMACOM books are available to corporations, professional associations, and other organizations. For details, contact Special Sales Department, AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019. Tel.: 212-903-8316. Fax: 212-903-8083. Web site: www. amacombooks.org This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.
Library of Congress Cataloging-in-Publication Data Davis, Sid. A survival guide for buying a home / Sid Davis. p. cm. Includes bibliographical references. ISBN 0-8144-7196-X 1. House buying—United States. 2. Residential real estate—Purchasing—United States. 3. Mortgage loans— United States. I. Title. HD259.D38 2004 643⬘.12⬘0973—dc22
2003024932
2004 Sid Davis All rights reserved. Printed in the United States of America. This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019. Printing number 10 9 8 7 6 5 4 3 2 1
Contents Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ix
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Chapter 1. First Steps to Becoming a Homeowner . . . . . . . . . . Renting vs. Home-Buying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owning Your Own Home, an American Norm . . . . . . . . . . . . . . Financial Advantages of Buying a Home . . . . . . . . . . . . . . . . . . . All About Leverage, Appreciation, and Equity . . . . . . . . . . . . . . . Tax Advantages of Buying a Home . . . . . . . . . . . . . . . . . . . . . . . . The Difference Between a Buyer’s Market and a Seller’s Market . Home-Buying Step One: Talk to a Mortgage Lender . . . . . . . . . . How Credit Scoring Affects Your Credit . . . . . . . . . . . . . . . . . . . . Working with Credit Reporting Agencies . . . . . . . . . . . . . . . . . . . How Much Home Can You Afford? . . . . . . . . . . . . . . . . . . . . . . .
3 3 5 6 7 8 8 10 11 13 16
Chapter 2. Mortgage Loans 101 . . . . . . . . . . . . . . . . . . . . . . . . . How the System Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FHA Guaranteed Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Department of Agriculture Loans . . . . . . . . . . . . . . . . . . . . . . . . . VA Guaranteed Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and Local Housing Programs . . . . . . . . . . . . . . . . . . . . . . . . Seller Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Understanding Points and Buy-Downs . . . . . . . . . . . . . . . . . . . . . All About Annual Percentage Rate (APR) . . . . . . . . . . . . . . . . . . . All About Private Mortgage Insurance (PMI) . . . . . . . . . . . . . . . . Loan Payment Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21 21 25 26 27 28 29 31 34 35 38
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Contents
Locking In an Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Sources of Down Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Shopping Mortgages on the Internet . . . . . . . . . . . . . . . . . . . . . . 45 Chapter 3. Finding and Working with a Mortgage Lender . . . . Avoiding Predatory Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prequalified vs. Preapproved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Paperwork Lenders Need to Get Started . . . . . . . . . . . . . . . . . . . . How to Find a Good Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All About Garbage Fees and Closing Costs . . . . . . . . . . . . . . . . . . Negotiating Lender Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working with a Lender on the Internet . . . . . . . . . . . . . . . . . . . .
47 47 49 50 51 53 59 61
Chapter 4. Once You’re Prequalified, It’s Shopping Time . . . . . Buy Conservative or Go for the Max . . . . . . . . . . . . . . . . . . . . . . Importance of Location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . How to Find and Work with an Agent . . . . . . . . . . . . . . . . . . . . . Narrowing Down Your List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Develop Your Dream House Shopping List . . . . . . . . . . . . . . . . . Pros and Cons of a Fixer-Upper . . . . . . . . . . . . . . . . . . . . . . . . . . Buying New Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ten Things You Should Know Before You Buy a New Home . . . How to Shop for a Home on Your Own . . . . . . . . . . . . . . . . . . . . Narrowing Down Your Choices . . . . . . . . . . . . . . . . . . . . . . . . . .
64 64 66 70 71 74 78 80 80 83 85
Chapter 5. Getting the Best Deal . . . . . . . . . . . . . . . . . . . . . . . . Emotional Factors Are Important . . . . . . . . . . . . . . . . . . . . . . . . . How to Determine What to Offer . . . . . . . . . . . . . . . . . . . . . . . . . What to Do When a House You Want is Overpriced . . . . . . . . . . Sellers Are Emotional, Too . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Getting the Sellers to Pay Concessions . . . . . . . . . . . . . . . . . . . . . Combining Grants and Seller Concessions . . . . . . . . . . . . . . . . . . Filling Out the Paperwork . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buying Bank Foreclosures and Short Sales . . . . . . . . . . . . . . . . . . Home Warranties Can Save You Money . . . . . . . . . . . . . . . . . . . . Home Inspections: Don’t Buy Without One . . . . . . . . . . . . . . . . Appraisals: They’re Not Inspections . . . . . . . . . . . . . . . . . . . . . . . The Unique Challenges of a Co-op or Condo . . . . . . . . . . . . . . .
87 87 88 92 93 94 95 97 98 101 103 106 108
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Chapter 6. Buying Condos, Co-ops, and Other Options . . . . . . Condos 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Condos and Co-ops in Urban Areas . . . . . . . . . . . . . . . . . . . . . . . Town Houses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PUDs (Planned Unit Developments) . . . . . . . . . . . . . . . . . . . . . . Twin Homes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing Condos and Town Houses . . . . . . . . . . . . . . . . . . . . . . Homeowners Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109 109 112 116 117 119 120 121
Chapter 7. Insurance Matters for Homeowners . . . . . . . . . . . . . Homeowner’s Insurance 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three Components of a Homeowner’s Policy . . . . . . . . . . . . . . . Condo and Co-op Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . Importance of a Home Inventory . . . . . . . . . . . . . . . . . . . . . . . . . How to Pick an Insurance Company . . . . . . . . . . . . . . . . . . . . . . Narrowing Down Your Choices . . . . . . . . . . . . . . . . . . . . . . . . . . Title Insurance 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
126 127 133 134 135 137 138 143
Chapter 8. Tax Aspects of Buying and Owning a Home . . . . . . How Tax Deductions Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Advantages of Working at Home . . . . . . . . . . . . . . . . . . . . . . Turning Extra Space into Tax Breaks and Income . . . . . . . . . . . . Property Taxes and Your Monthly Payment . . . . . . . . . . . . . . . . . Property Taxes 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buying a Home Using Your 401(k) or IRA . . . . . . . . . . . . . . . . . . 1031 Tax Deferred Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147 147 148 150 152 153 159 159
Chapter 9. Selling Your Home and Moving . . . . . . . . . . . . . . . . Shaping Up Your Home to Sell for the Most Money . . . . . . . . . . Positioning Your Home to Get the Most Money . . . . . . . . . . . . . How to Determine Asking Price . . . . . . . . . . . . . . . . . . . . . . . . . . How to Handle an Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . How to Find and Work with Movers . . . . . . . . . . . . . . . . . . . . . . Moving-Related Tax Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . Moneymaking Garage Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
164 164 168 170 171 174 176 177
Chapter 10. Buying a Manufactured, Modular, or Mobile Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 The Different Kinds of Manufactured Homes . . . . . . . . . . . . . . . 184 Owning vs. Renting the Lot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
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Manufactured Home Money Matters . . . . . . . . . . . . . . . . . . . . . . How to Shop for a Manufactured Home . . . . . . . . . . . . . . . . . . . Tips on Buying a Building Lot . . . . . . . . . . . . . . . . . . . . . . . . . . . Building Permit and Site Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resale Value of Manufactured Homes . . . . . . . . . . . . . . . . . . . . . The Bottom Line on Buying Modular and Manufactured Homes
188 189 191 193 194 199
Chapter 11. How to Avoid the Fifteen Costliest Mistakes Homebuyers Make . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Not Planning Your Move . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Buying a Home Before You’ve Sold Your Current One . . . . 3. Not Getting a Preapproval Letter . . . . . . . . . . . . . . . . . . . . . 4. Not Having an Exit Strategy . . . . . . . . . . . . . . . . . . . . . . . . 5. Not Checking Out the Neighborhood . . . . . . . . . . . . . . . . . 6. Buying the Wrong Type of House . . . . . . . . . . . . . . . . . . . . 7. Buying a Home on Impulse . . . . . . . . . . . . . . . . . . . . . . . . . 8. Buying a Property That’s Hard to Sell . . . . . . . . . . . . . . . . . 9. Overextending Your Budget . . . . . . . . . . . . . . . . . . . . . . . . . 10. Not Protecting Yourself When You Make an Offer . . . . . . . 11. Getting Family, Relatives, and Friends Too Involved . . . . . . 12. Not Being Able to Make a Decision . . . . . . . . . . . . . . . . . . . 13. Not Getting a Buyer’s Broker Early On . . . . . . . . . . . . . . . . 14. Not Getting a Professional Home Inspection . . . . . . . . . . . . 15. Not Checking Out the Homeowners Association First . . . .
200 200 201 202 203 204 205 206 207 208 209 210 211 212 214 215
Appendix A. Shopping Comparison Checklist . . . . . . . . . . . . . . 219 Appendix B. Step-by-Step Checklist to Owning Your Dream Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 Appendix C. Step-by-Step Checklist to Buying a Condo or Co-op . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 Appendix D: Checklist of What Your Mortgage Lender Needs to Get Started . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 List of Additional Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
Preface Buying a first home is one of life’s major milestones, rating up there with a first date, owning your first car, or graduating from college. Taking that big step toward attaining the American dream can be a time of stress and frustration or a time of adventure and excitement. In twenty-five years as a real estate broker working with first-time homebuyers, I’ve found that those who do a little homework find the homebuying process a lot more fun than those who approach it cold. Getting your ducks lined up first will not only make the process exciting, but will save you a lot of money. Unfortunately, too many people feel buying a home is like buying a car: Cruise the lots (subdivisions and open houses) until you spot a set of wheels (home) that you can’t live without. True, you can find a home like this, but the chances are overwhelming that you’ll end up paying thousands of dollars more for the house, a higher-interest loan, and hundreds of dollars in unnecessary closing fees. Fortunately, there’s a better way. In this book, I’ve tried to give you the tools and a plan of action that’ll make the buying process fun while saving you considerable time and money. Included are real-life examples from my files of buyers who have done things right and buyers who have made costly mistakes. Hopefully, their examples will help make your homebuying project much easier and more profitable. Special thanks are due Blaine Rickford, president of Arbor Capital Mortgage, for his mortgage expertise, deal-making ability, and patience over the past fifteen years. And of course, a big thanks is owed to the buyers and sellers—many recycled several times—who made this book possible.
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Introduction According to the National Association of Homebuilders 2002 Almanac, in 1950 about 55 percent of the 43 million housing units were owner occupied. Fast forward to 2000, and housing units jumped to 107 million, with 67.4 percent owning their own home. The trend is predictable. Tax laws, social structure, and the financial pluses of owning will continue to reward the homeowner. It doesn’t look like it’s going to change in the foreseeable future, because owning a home has become a major part of the American dream. But, that part of the dream is changing. It’s bigger now. Beginning with a starter home and then moving up in a few years to a larger, newer one is fast becoming the norm. As a result, a home is no longer just a place to live and raise the kids; it’s become an important financial asset that is often tied in to retirement planning. After moving up two, three, or more times, the goal is to have your dream home with no mortgage or at least a lot of equity. You can do this successfully and have fun along the way if you do a little homework and make good home-buying decisions. Unfortunately, too many homebuyers approach the process casually. Perhaps they don’t realize that their decisions can have a major impact on their lives for many years to come, that good decisions will make their lives happier and contribute to their financial future, that bad decisions will add stress, create turmoil, and cost big bucks. Making good decisions is especially critical to first-time homebuyers. Doing well on your first home gives you the credit, down payment, and appreciation needed to move up to your dream home. Then, after many years as a homeowner, your kids have left, the house is too big and you’ve accumulated a lot of equity as a result of
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Introduction
good home-buying choices. You can use the equity tax free (up to IRS limits) to do what you want. For instance, one couple with a lot of square footage in an upscale area sold their home, moved into a luxury 35-foot motor home, and drove off into the sunset. Another couple retired, sold their home of 20 years, and bought an oceanfront condo all in a two-week period. For most people the key to a stable financial future starts with buying their first home. And that’s the purpose of this book, to help you make the best home-buying decisions possible and create the most equity possible. Its pages, anecdotes, and charts show you: How to cut through the hype and find a good mortgage lender How to know you’re getting the best mortgage deal by comparing Good Faith Estimates How to fine-tune your credit so you can get the best interest rate Tips on coming up with a down payment How to find your dream home and get the best deal possible How to avoid home-buying traps that can cost you big bucks How to avoid common pitfalls when you buy a condo, co-op, or town house Money-saving tips on buying homeowners insurance How not to be ripped off when buying a manufactured or modular home. Numerous examples of problems other homebuyers have encountered and solved Checklists that guide you through the maze of home-buying decisions you’ll need to make Feel free to download free house-hunting and money-saving worksheets and forms—in PDF format—from my Web site, www.siddavis.com.
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First Steps to Becoming a Homeowner Becoming a homeowner can be a bittersweet experience. You want to get out of the apartment into your own home so you can do your own thing decorating and landscaping if you get a yard. But, on the other hand taking on a commitment for 30 years can be scary. All the whatifs can play like an old silent horror movie through your imagination. Basically, committing to a mortgage is not much different from signing a rental agreement. If you rent, you’re going to be signing quite a few leases over the next 30 years, and the terms are often less in your favor than a mortgage. However, they both have one thing in common: Make your rent payment and the landlord won’t bother you. Make your mortgage payment and the bank won’t bother you either. Except with the bank you get the house free and clear after 360 payments. With the landlord, you get a smile and a thanks for paying off his or her mortgage. This chapter gets you started on the exciting road to owning your own home. You learn step-by-step what to do and what to avoid. Included are many real life examples that illustrate how millions of other homebuyers have blazed a path for you to follow in finding your dream home.
Renting vs. Home-Buying Gerald and Bonnie lived in a three-bedroom brick bungalow in an upscale neighborhood. In the years they lived there, they raised their
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two children, were active in community activities and their lifestyle was similar to other families on their tree-lined street except one. They were renters. They rented from a homeowner who lived three houses up the street and built the home as an investment when he built his own home. For 25 years, Gerald and Bonnie rented their home and treated it like their own. Then their landlord suddenly died of a heart attack, and a couple of months later the family gave Gerald and Bonnie a 30-day notice to move. One of the heirs decided she wanted the home. A heart breaking situation for Gerald and Bonnie, and one that happens all too often. When you’re a tenant you have little control over your housing future. Even more tragic in this case, the tenants over the years paid off the owner’s mortgage and gave him a good tax deduction while the home’s value appreciated from $22,000 to $185,000! As the movers loaded furniture, Bonnie came across a file box she kept important papers in. There, neatly stacked, were 25 years and four months of rent receipts. All they had to show for their 304 monthly rent payments were a lot of good memories. In reality, Gerald and Bonnie had missed the boat. If the owners had offered to sell the home to the tenants, they would most likely have gotten a mortgage and ended up paying $185,000 for the house over the next 30 years. They would have paid for the house twice and made their last payment when they were 90 plus years old. Most financial planners agree that it’s best to buy a home as soon as possible in life so that you can start building equity, get the tax breaks, and create financial stability.
When Renting Is a Good Way to Go The stability of being a homeowner is the dream of most Americans. Renting is viewed by many as an interim step to the white picket fence. But, there are times when renting can be the best short-term strategy. For example, if you’re going to be in an area a short time or your job is unsure, renting may be the best choice. That’s because if you buy, three years is usually considered the break-even point when you’ve built up enough equity to cover selling and improvement costs. But in some hot markets, that break-even point can happen in months or even weeks or less. It can also be a good strategy to lease a home for a few months while getting to know an unfamiliar area. Taking time to do your
First Steps to Becoming a Homeowner
5
homework on finding the right neighborhood and house can save you an expensive move later on. However, sometimes it’s not that simple. If you happen to move into a market Interesting numbers from where home prices are going up—often the National Association of called a seller’s market—renting for more Realtors: than a few months can cost you equity that you should be building. In a strong 67.4 percent of Americans own their own home. seller’s market, it can become a feeding frenzy. Buyers snap up homes they nor- 1.2 million new singlemally wouldn’t consider because of the family homes are fear that if they don’t buy now, they won’t projected to be built get another chance. each year through 2010. An upside of a hot market is your monthly payment is locked in as you ride 57 percent of Americans the appreciation tide upward. However, if consider their refrigerayou’re renting your landlord will be riding tor the appliance they the tide by raising rents and that means rely upon most. you’re paying off his mortgage faster, not 6 percent of Americans feel yours. Not surprisingly, the flip side of a sellthe same way about their er’s market is called a buyer’s market. In dishwasher. this instance, there are more homes for sale than there are buyers. Buying is easier, and good deals are plentiful, but this market also has its pitfalls. Chapter 5 covers in detail how to buy and profit in both buyers’ and sellers’ markets. The bottom line is that no matter what market you find yourself in, investing in a home makes the best social and financial sense.
Owning Your Own Home, an American Norm The decision to become a homeowner means you’ll have lots of company. More than 63 percent of Americans own their own home. The fact that so many opt to buy rather than rent presents a strong case that home ownership must be a good way to go. And for most people it is, culturally, psychologically, and financially. Our country is founded on family values, and for most homebuyers this is a major reason to buy a home. It gives family members a sense of belonging, a sense of putting down roots, and a sense of community caring that renting doesn’t give.
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A Survival Guide for Buying a Home
Also, having a place that you can improve and express your decorating talents in is another important reason people give for wanting a place of their own. Never again will renting be the same after tasting your newfound freedom to Informative Web sites to paint rooms your favorite colors or experget you started: iment with plaid carpets and floral wallpaper. You can let your home improvement www.homestore.com genius take you where no homeowner has www.hud.gov/fha gone before. www.bankrate.com Justin and Susan did this when they www.realtor.com bought their first home, a ten-year-old, www.nolo.com three-bedroom, two-bath trilevel. After the couple rented a dark basement apartwww.homebuilder.com ment for five years, Susan’s pent-up creativity exploded. She and Justin painted every room a different, bright color and decorated them with matching accessories. When they found out a baby was on the way, they were thrilled, not only by the addition, but also by the opportunity to create the perfect nursery in all the Disney colors. True, there’s stress involved in buying and owing a home. But, once you’ve gone through the right-of-passage of house hunting and qualifying for and signing a small mountain of closing documents, the rewards for most people far outweigh the negatives.
Financial Advantages of Buying a Home It’s no secret that home ownership is a good financial move. A few advantages are: It’s a way many Americans build net worth and add financial stability. It can be like a forced savings plan, a way to save for retirement or pay for the kids’ college. Since the 1950s, land and home prices have steadily increased. You can leverage a small down payment into a large return. Your monthly payment stays the same with a standard mortgage. Rents, on the other hand, are unpredictable and usually go up.
First Steps to Becoming a Homeowner
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If you choose improvements wisely, you can increase the home’s value and equity, sometimes dramatically.
All About Leverage, Appreciation, and Equity When a low down payment controls an asset worth many times the money you put down, the financial people call it leverage. For example, if you put $6,000 down on a $200,000 house, your $6,000 controls a $200,000 asset. If the home’s value goes up to $225,000 over the next three years, your $6,000 becomes worth $25,000—a 317 percent return on your investment, thanks to leverage. When a home’s value increases, it’s called appreciation. In the example above, the appreciation would be $25,000. On the flip side, if the home had gone down in value, there would be depreciation. Another term used a lot in the real estate industry is equity. This is the difference between a home’s current value and the loan balance. It can go up or down, depending on the local real estate market. If a mortgage balance is $200,000 and the current market value is $250,000, the difference of $50,000 is equity. If you were to talk to a mortgage lender about a second or home equity loan, the lender might tell you she is willing to go up to 90 percent of your equity. Your loan check would then be for $45,000 (90 percent of $50,000) in the above example. In some areas of the country, homes have appreciated dramatically the last few years. If you were to sell and move from a high appreciation area like San Francisco to a lower appreciation area like North Dakota, your equity and the same monthly payment could allow you to buy a significantly larger home. Tony and Mariela found this out when they moved from Orange County, California, to Salt Lake City, Utah. Five years ago in California, they had put $16,000 down and took out a $304,000 mortgage on a 2,900 sq. ft. 3-bedroom, 2-bath ranch. When they recently sold their home for $469,000 they profited $152,200 after selling expenses. Buying a similar home in Utah they found would cost them approximately $195,000. By the same token, if Tony and Mariela had moved from Utah to California they would have received a bad case of sticker shock. At the same price and monthly payment they had before, they would probably only be able to get a one bedroom loft or condo. Although the national economy strongly influences local real es-
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A Survival Guide for Buying a Home
tate, the equity you accrue is still dependent on local supply and demand. When you cash out your equity and move to another area, you’ll most likely get either a housing upgrade or suffer sticker shock. This economic reality also applies to renting. Moving from an apartment in Fargo, North Dakota, to New York City would also give you sticker shock, but as a renter you wouldn’t have any equity from your last house to cushion you.
Tax Advantages of Buying a Home Taxwise, it’s true that the deck is stacked in the homeowner’s favor. To illustrate, let’s assume both a homeowner and a renter are in the 25 percent tax bracket and earn $60,000 annually. The renter pays $1,000 in rent and the homeowner pays $1,000 a month principal and interest on a $150,307, 30-year loan at 7 percent. The homeowner also pays out $1,500 a year for property taxes. When tax time rolls around, the difference in taxes paid is significant. The Itemized vs. standard renter pays income taxes on $60,000 indeduction come, or $15,000 (25 percent tax bracket You should itemize times $60,000). The homeowner, however, can deduct when mortgage interest, $11,973 ($10,473 interest plus $1,500 property taxes, and other property taxes) from his $60,000 income deductions exceed your before calculating tax liability. Subtracting standard deduction. For de- this deduction from income leaves $48,027. Multiply this by the 25 percent tax bracket tails, go to Web site www. and taxes paid come to $12,007. irs.gov. Look for topic/ The savings is $2,993 for the year, or publication 501. $249 per month. You can also look at it as an $8.30 per day penalty for renting when you divide the monthly savings by 30 days. So no matter how you slice it, Uncle Sam is willing to pay you to become a homeowner! Even though the foregoing example is typical, it’s a good idea to consult a CPA or other tax professional to determine the exact deductions for your situation.
The Difference Between a Buyer’s Market and a Seller’s Market The real estate market is in constant motion. Like a giant pendulum it swings from a buyer’s market to a seller’s market and back again.
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Where the market is in the arc depends on many factors. Most common are interest rates and what direction they’re heading, local employment, and the national economy. These factors in turn affect the number of homes on the market.
Buyer’s Market No matter what part of the country you’re living in, the real estate market will be in flux. If it’s a buyer’s market and there are lots of homes for sale, it’s good for buyers but not quite so good for home sellers. This is the time to buy a home. Buyers who do this and then happen to sell when the market pendulum swings to the other side make lots of money. If you can catch the market at the right time, your detached home, condo, or manufactured home will yield a good profit. High interest rates, recession, a local employer shutting down or cutting back on its workforce are some causes of a buyer’s market. In fact, anything that affects the local housing market negatively or seasonally can cause a short or long-term buyer’s market. In this type of market, prices and terms soften. Sellers are more willing to pay buyer concessions to get their home sold. Typical concessions that buyers often get sellers to make are: paying all or part of the closing costs, accepting low offers, throwing in appliances or fixtures, and giving carpeting or painting allowances. It’s a great market if you want to buy, but not if you have to sell, as Mark and Rachael found out when Mark’s employer consolidated branches and moved his office to another town. That left Mark and Rachael with two choices, either sell and relocate or find a new job in an economically down area. They decided to accept the relocation and sell their three-year-old home. Because they had recently refinanced their mortgage and paid off a few credit cards, Mark and Rachael had little equity left. They had no room to pay concessions or lower their asking price. They were in a financial corner with few options that wouldn’t cost them thousands of dollars in the months ahead. In the end, they had to rent their home to cover as much of the mortgage payment as possible. Eventually, they hoped the market would improve so that they could sell the home for what they owed.
Seller’s Market The flip side, a seller’s market, is the result of more buyers than homes for sale. Since real estate is a function of supply and demand, fewer
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A Survival Guide for Buying a Home
homes on the market create a rising tide where all home values in the area go up. The more desirable areas, however, go up faster and top out higher before the market flattens out. The truism, location is everything, becomes obvious in this situation. Also, when home prices are going up dramatically, entry and midlevel homes become especially hard to find. Since condos and town houses are less expensive to get into and tend to attract first-time homebuyers, this market can explode. Homeowners who bought when the market pendulum was in buyer’s territory will see their return on investment skyrocket. If you’ve outgrown your condo or town house, this would be the time to cash out and move up. If you’re buying a home in this market, see the strategies for shopping and making offers covered in Chapter 4.
Home-Buying Step One: Talk to a Mortgage Lender Once you’ve decided it’s time to become a homeowner, the first step is to take a look at your financial situation and ask yourself two questions: (1) Is your job/career reasonably stable for the foreseeable future? (2) Can you handle a commitment for making monthly payments long term? If you can answer yes to both questions, then it’s time to move on to the next step and talk to a mortgage lender.
Qualifying for a Loan Mortgage lenders are often depicted as shadowy figures who try and find ways to deny applications and keep homebuyers out of their dream house. But in reality, the opposite is true. Lenders work hard and often go the extra mile to make a loan work. A mortgage broker takes your credit and income data and assembles it into a profile of you as a long-term borrower. Your file is then shopped to various investors by phone, fax, or e-mail. Since the mortgage industry is highly competitive and investors are not all alike in their rates and terms, a good mortgage broker will sift through the offers and negotiate the best deal possible on your file. The investor who agrees to make you a loan, based on the information provided, e-mails a commitment to the mortgage broker. Sometimes there are conditions included or requests for additional information. Once everything is in order, the investor usually e-mails or faxes the loan documents to the title company or closing agent.
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How Credit Scoring Affects Your Credit Because most lending is Internet based, a credit standard is needed to put everyone on the same page. As a result, credit scoring was developed and has become a universal, though sometimes controversial and misunderstood, standard. FICO scoring, the industry standard, is named after Fair, Isaac and Co. the For more information on California-based firm that developed the credit bureaus and FICO software. It creates a computer-generated credit scoring, check out: numerical grade that predicts a lender’s www.myfico.com risk in loaning you money. Your FICO score can change from day to day depend- www.creditexpert.com ing on what information is available from www.Experian.com various credit sources. www.Equifax.com When a mortgage lender orders a www.Transunion.com credit report, the credit bureaus evaluate www.icreditreport.com and assign a numerical score to five differwww.mycreditfile.com ent parts of your credit history. Two of the five factors that relate to your payment history and how much current debt you have make up roughly 65 percent of the score. The length of your credit history, recent credit inquires, and type of credit you use make up the remaining 35 percent. FICO scores range from 300 to about 850, and the better your track record paying loans back promptly the higher your score. Typically, scores of 650 plus get the best rates and terms. Homebuyers with scores in the 620 to 650 range still won’t have a problem finding a mortgage, but the interest rates may start to creep up. Scores under 620 are subprime territory, and interest rates can ratchet up 2 percent or more. Down payments required also climb, sometimes to as high as 30 percent. When Ron and Wendy applied for a $175,000 mortgage, they didn’t think a couple of 30-day late payments on their two maxed-out Visa cards would cause a problem. But, when their lender called asking about a two-year-old medical collection account they had forgotten about, the situation started to look grim. Ron and Wendy told the lender they thought the insurance company was supposed to pay the bill. But they never took time to follow up and ignored several statements from the clinic. After about four months, the clinic sent the account to a collection
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A Survival Guide for Buying a Home
agency, which reported to the credit bureau and Ron and Wendy’s credit score took a big hit. With a credit score around 600, the lender felt she could still put a loan toEach discount point equals gether but Ron and Wendy would have to pay off the collection account first. They 1 percent of the loan would also need at least 10 percent down, amount, and lenders often pay an interest rate one percent higher charge points to increase than the current market rate, plus two distheir yield (profit) on a count points. In real dollars and cents terms a low below market interest rate. credit score will cost Ron and Wendy: See Chapter 2 for details on points and buy-downs.
Two discount points, or $3,150
$104 a month in higher payments or $3,744 over three years. Hopefully, they can get their credit cleared up and refinance to a lower interest rate by then. The bottom line is that your credit score determines how much your mortgage will cost you in interest and closing costs. In Ron and Wendy’s case, not taking their credit seriously cost them $6,894 in penalties.
With Subprimes, It’s Buyer Beware If your score is under 620, you may want to consider building your credit before getting locked into a subprime mortgage. With subprimes it’s buyer beware, so you definitely want to read the find print. These loan programs often have predatory prepayment penalties and inflated terms. It may be worth taking a year or two to repair your credit before buying a home. Manuel and Geri wanted a home so badly that they went along with a lender who told them they could get a loan, but only at 2 percent over par. They were also told they could refinance in a year and lower their interest rate. Even worse, closing fees cost them nearly 8 percent of the loan, almost double the norm. These fees were added into the loan making the monthly payment even higher. After a year of making all their payments promptly and paying down much of their debt, Manuel and Geri went in to refinance for a lower rate. It was a shock when they were told that it would cost them nearly $4,000 in prepayment penalties to refinance. Their loan documents had a clause that if the loan was paid off within three years it would cost 4 percent of the loan balance in penalties.
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First Steps to Becoming a Homeowner
This left the homeowners with few options—continue paying a high interest rate for two more years or pay the prepayment fee—not a good situation. Manuel and Geri may have been better off taking a year or two to clean up some credit problems rather than getting locked into a subprime loan. However, it can be a difficult call. Some lenders argue that it’s better to get a home now with a subprime loan than wait until real estate values are climbing. That may be true, but before committing to a higher than par interest rate, it’s still a good idea to have a competent financial adviser run the numbers and read the fine print.
Working with Credit Reporting Agencies Three national credit-reporting agencies, Experian, TransUnion, and Equifax Inc., are competing companies that assemble your credit information into numerical scores. A mortgage lender will usually get reports from one or Although FICO credit scormore of these companies when you apply for a home loan. Because each reporting ing is the by far the biggest agency gets its information in a slightly player on the block, a few different way, it’s not uncommon for your mortgage investors have credit score to differ by 20–50 points. developed similar scoring That’s not always a problem. Mortsystems to fine tune credit gage lenders will typically update discrepancies or reconcile differences in your data for their market. Also, other criteria can report(s) to get a current picture of your credit for better (hopefully) or worse (un- be added to the mix to defortunately). termine your eligibility. For If there are problems, the lender may ask you to write a short letter explaining example, FHA (Federal your side. Should you have to write one Housing Administration) of these letters, keep it short and stick to and VA (Veterans Administhe facts. Applicants sometimes get car- tration) government inried away and include the family history. sured programs give
How to Maintain Your Credit
lenders some leeway to
Credit scams abound where operators promise to ‘‘fix’’ your credit for a few hundred dollars. Unfortunately, there are
consider your individual situation.
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A Survival Guide for Buying a Home
no quick fixes, magic potions, or silver bullets that will transform a credit rating from bad to good. It’s obviously better to spend the money paying down a credit card than buying into a credit fixing scam that in the end won’t improve your credit. Fortunately, there are several things that you can do to improve your score: Pay down debt on high-interest credit cards as much as possible. Getting balances under one-half the limit is best. Credit score reducing traps: Avoid preapproved credit card and extended financing offers until after you close. Close accounts that you don’t use. Mortgage lenders don’t like to see lots of open accounts. Avoid switching insurance companies or refinancing; these often bring on new inquiries.
Pay off and close out small, seldom used accounts. Too much credit can be a negative. Limit the number of inquiries on your credit. A flurry of credit checks can raise a red flag and cost you points Of course, the best credit builder is making your payments on time. Late payments (30 days or more) are guaranteed to slash points from your FICO score. Your payment history for the past two years has the most weight. Prior problems such as a bankruptcy have less or no impact after two years if you clearly show that you’ve cleaned up your act.
Work with a reputable mortgage lender. (Chapter 2 shows how to pick a good lender.) Most lenders will be glad to go over your credit and work up a list of areas you can improve or problems that need to be corrected. They know the credit system and what it takes to get you qualified for the best mortgage rates. Definitely, don’t follow Barry and Kelli’s example. Their lender told them that with their 720 credit score and stable job history, they wouldn’t have a problem qualifying for the new home they wanted. Excited by the news, they went furniture and appliance shopping, opening a Home Depot and local furniture store account. Barry and Kelli, feeling they were smart shoppers, put their purchases on both stores’ 90-days-free-interest plans. A few days later when the mortgage lender updated Barry and
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Kelli’s credit report before submitting to underwriting, she was shocked to find that their FICO score had dropped to 613. The lender had counseled them to avoid any credit applications or transactions until they closed on their mortgage. But in the excitement of their first home, Barry and Kelli got carried away. Unfortunately, this eliminated them from buying their dream home anytime soon.
Importance of Good Records Occasionally, credit bureaus are slow to record paid off loans, especially student loans. Since credit scoring is only as good as the data fed into it, it’s important for consumers to have backup paperwork. Paid off judgments, collection accounts, and other credit problems can take a long time working through the system. It’s especially important in these cases that you have the paperwork clearly showing the payoff, along with canceled checks. Too many loan approvals get held up at a critical time, jeopardizing that dream home because the buyers lost or didn’t keep vital paperwork. Keeping your finances on Quicken, Microsoft Money, or a similar program is a great way to track accounts. You can record payments with dates and check numbers, and if a question arises, you can print out payment histories and payoff dates with check numbers. With a paper trail you’re covered and don’t have to waste time and incur bank fees verifying payoffs.
Why Lenders Won’t Accept Credit Report Copies Each time a mortgage lender orders a credit report on you it’s going to cost $50–$80. Lenders insist on getting their own report directly from the source to protect themselves from any fraud or tampering. Shopping lenders is fine; just don’t let each one you talk to order a credit report. Wait until you decide on a lender before writing a check for a credit report. Unnecessary inquires can influence your credit report negatively.
Correcting Credit Problems Credit reporting is far from being an exact science, and errors and misreporting are all too common. Fortunately, you can usually clear up errors and problems on your own without paying hefty fees. If you have a disagreement with a credit agency there are certain
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A Survival Guide for Buying a Home
rights you have through the Fair Credit Reporting Act (FCRA). The FCRA gives you effective avenues to resolve reporting disputes. The FCRA isn’t a way to erase legitimate late pays on your report or a wizard For Fair Credit Reporting to turn bad credit into good, but a legal avenue to remove errors. Act information on how to It’s usually best to work closely with correct errors, go to Web your mortgage lender to remove or correct site: www.ftc.gov or call 1errors. They are professionals who know 877-382-4357. their way around the credit-reporting arena.
How Much Home Can You Afford? The biggest mistake most homebuyers make is to start looking at homes before they know what they can afford. This often leads to frustration and discouragement when they talk to a lender and find out that their tastes are Mercedes but their income is Yugo. The best and least stressful way is first to determine what house payment you can afford and then go from there. Although each lender can have a slightly different focus, most like to keep income-to-debt ratios close to the following numbers. Typically, total debt plus the mortgage payment with principal, interest, taxes, and insurance included (PITI) shouldn’t exceed 40 percent of your income before taxes. But in some instances, where the borrower has exceptional assets, credit score, and/or other pluses, this ratio can go as high as 50 percent. Total house payment (PITI) shouldn’t exceed 30 percent of gross monthly income. Here again, in exceptional cases this ratio can go up to 33 percent. For first-time homebuyers, however, the 30/40 ratio is probably the one most lenders will be using when they work up the numbers. For example, when Aaron and Ronda decided to buy a home, they sat down and looked at their pay stubs for the last couple of months. Their combined income totaled $7,240 a month before deductions. Adding up their monthly payments—$545 for a car payment, $150 for the Visa card, $75 for the Discover card, and a $190 student loan— totaled $960.
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Because of Aaron and Ronda’s good credit score, job history, and their ability to pay a 10 percent down payment, their mortgage lender told them they would be able to afford 41 percent of their income minus their debts. When you do the math, 0.41 $7,240 equals $2,968.40, and subtracting FHA qualifying ratios have monthly debts of $960 gives $2,008.40 as the maximum mortgage payment, which more latitude than Fannie includes interest, principal, taxes, insur- Mae or Freddie Mac ratios. ance, and mortgage insurance premium Depending on credit, a bor(MIP). rower can go up to 55 perMIP is an extra insurance policy that cent total debt. insures the lender against borrower default when the down payment is less than 20 percent. The fee, usually .50 to .75 percent of the loan amount is based on your down payment. It can drop off when your equity through pay down or appreciation reaches 20–30 percent. Monthly taxes, insurance, and MIP are obtained by adding the yearly premiums and then dividing by 12 months. (Property taxes vary considerably from state to state, so call your county assessor for data on your area.) Assuming that $402, or 20 percent of the payment, goes to taxes, insurance, and MIP ($2,008 .20 $402) and subtracting from $2,008 leaves $1,606. Using a financial calculator and keying in a payment of $1,606, 6.0 percent interest, and 30 years (360 months) gives $267,867 as the maximum loan amount. Since Aaron and Ronda are putting 10 percent down, or $29,763, that is added to the loan amount to get $297,630 as the maximum home price they can write an offer on. (Condos, co-ops, and town houses have additional fees that are covered in Chapter 6, Buying Condos, Co-ops, and Other Options.)
How Lenders Look at Income from a Second Job Income from a second job may or may not help your chances of getting a loan. If you’ve been on the second job for less than a year, many lenders won’t count it. Also, part-time sales income and other sources that can’t be verified on your tax return also stand a slim chance of helping your ratios. Monthly payments from child support and other verifiable income streams can usually be counted, especially if they show up on your tax return.
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A Survival Guide for Buying a Home
Aaron and Rhonda’s Worksheet There are two ratios that lenders look at to determine how much house you can afford. 1. The first, called the front or top ratio, is simply the ratio of your housing expense to your gross income. It’s calculated by: Gross monthly income $7,240 .30 $2,172 2. The bottom or back ratio is all of your recurring debts including house payment subtracted from your gross income. This is calculated by: Gross monthly income $7,240 .41 $2,968 monthly recurring debts: Car loans Credit Cards ($150 $75) equals School loans Child support Other debts Total monthly debts
$545.00 $225.00 $190.00 $ -0$ -0$960.00
Subtract total debts ($960) from the result of multiplying your gross monthly income by .41. This equals $2,008. The lesser of front and back ratio ($2,008) is the amount of the total house payment you can qualify for that includes taxes, insurance, principal, interest, and PMI. The next step is to subtract the taxes, insurance, and PMI to get the principal and interest payment. Since taxes, insurance, and PMI account for roughly 20 percent of the payment, multiplying $2,008 .80 equals $1,606. If you have a financial calculator, key in $1,606 for the payment, 6 percent interest on the interest key, and 360 payments (30 years) on the term key. Then hit the PV (present value) or loan amount key, and you’ll get $267,934. Add in the down payment of $29,763, and you’ll get $297,630 as the house price you can write an offer on. You can also go to www.mortgagexpo.com and click on calculators, then click on What house can I afford? Enter the total payment amount and the calculator will figure out your house price.
If you need to include income from child support, you have to give the lender a copy of the divorce decree and bank statements showing that the money is coming in monthly. In one particular sale, a buyer had sold a rental home a couple of years ago and carried the financing. Although the monthly cash flow coming in was less than $200, he reported the income on his federal
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tax return and could show the lender a paper trail. It made the difference in qualifying for the loan. In another instance, a mortgage applicant was tending several small children in her home. She couldn’t document the cash flow from tax records, so the lender wasn’t able to credit the income on the application. The key is to prove to the lender that the income is consistent and long term Financial calculators: You from tax records or bank statements. can buy inexpensive finan-
Automated Underwriting One of the biggest changes in mortgage lending to come along the last few years is automated underwriting or desktop underwriting, as it’s sometime called. Developed by Fannie Mae and Freddie Mac, the goal was to streamline the loan process and improve the quality of loans these agencies purchased from banks and mortgage brokers. This marriage of the Internet with a vibrant secondary market that buys the loans from banks and mortgage brokers is a huge plus for homebuyers.
cial calculators from Staples, Office Max, Office Depot, etc. Calculated Industries has an excellent series that you can order online at www.calculated. com. Most of the mortgage lender Internet sites such as www.mortgagexpo.com have financial calculators. Also, you can download software from www.Sales templatezone.com. If you
How the System Works
have a Palm Pilot, check out
When you apply for a mortgage, the loan www.palmgear.com. officer enters your employment, income, assets, and credit history into a program that is connected to a Fannie Mae or Freddie Mac computer. The program compares your loan data to a programmed standard. If your application is within the standard, you’ll get a quick approval. If it’s not, you’ll get a quick no. If it’s close but not quite good enough for approval, your application will go to an underwriter, who will look at it more closely. Sometimes your application may get rejected, but with a little tweaking, your loan officer can get it approved. Paying off a credit card to increase a credit score or verifying ongoing overtime for example, can make your application fly the second time around.
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A Survival Guide for Buying a Home
Interestingly, these qualifying programs appear to favor good credit scores. If you have a high debt to income ratio but a good credit score, you’ll most likely get an approval.
How This System Benefits You Once your loan officer has your application and verified the data, she submits the package for Fannie Mae or Freddie Mac approval. Most likely you’ll get a phone call within hours with an approval, a ‘‘no,’’ or a ‘‘let’s talk about it.’’ This fast turnaround means that within a day or two you can know if your loan is approved so you can start making plans. Another advantage of the automated system is once you have approval, your loan officer can shop the loan to different investors to get you the best deal. The key to making the system work for you is having the best credit score you can and presenting a stable employment history. If your income to debt ratios are a little high, the chances are you’ll still get an approval. If, after reading this chapter, you get the feeling that the mortgage lending system is biased toward good credit scores, you’re right. Letting your credit score dip can cost you big time.
Y
C H A P T E R
2
Mortgage Loans 101 Now that you know how mortgage lenders qualify your credit and income for a loan, the next step is to look at the mortgage smorgasbord you’ll get to choose from. Loans now come with as many options as a fully loaded SUV. With automated underwriting systems, lenders can custom tailor a mortgage to fit just about any situation. On the surface it looks confusing and a little discouraging, but have hope. This chapter gives you the tools to work with a lender and narrow down the loan options to a program that’s right for your financial goals and cash flow. In this chapter we also cover ‘‘mortgage-speak,’’ the terms and phrases lenders are fond of using. Knowing what your friendly loan officer is talking about is important for you to get the best deal possible. In short, this chapter gives you the confidence to work with a lender and pick out the best loan program while saving you a few thousand dollars. Figure 2-1 shows you at a glance most of the different types of loans to be discussed in this chapter and their respective advantages and disadvantages.
How the System Works The mortgage industry works much like the rest of the economy. It has retail and wholesale sectors that work together to create a plentiful supply of money for homebuyers to borrow. The system is so efficient that it has helped more than 60 percent of American households buy homes.
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A Survival Guide for Buying a Home
FIGURE 2-1 Loan types. Loan Type
Advantages
Disadvantages
Federal Housing Administration (FHA)
3 percent down. Family can gift, help with costs, or cosign. Seller can pay closing costs. Higher qualifying ratios for easier approval. No prepayment penalties.
Low loan limits that vary from county to county. PMI required regardless of down payment.
Veterans Guaranteed Loan (VA)
Veterans can get in for nothing down. Qualifying standards are more flexible. No prepayment penalties.
For nothing down, sellers must be willing to pay the closing costs and VA funding fees. Loan limits of $240,000.
Conventional (conforming)
Wide range of lenders, payback options, and low interest rates. Loan limits up to $322,700. PMI drops off when you attain 20 percent equity. No prepayment penalties.
Must have reasonably good credit and a standard profile for the best interest rates. Not as flexible as FHA for lower price ranges.
Conventional (nonconforming)
Many lenders have their own niche, specializing from jumbo to subprime loans and for credit and/ or job challenged. If you have a special need, there’s probably a lender that does it.
These programs typically cost you more in interest and closing costs because you don’t fit the credit or employment norm. Prepayment penalties are common with these loans.
Seller financing
Can be the cheapest way to finance a home. Few closing costs and whatever interest rate you can negotiate.
You’ll need a good real estate broker or attorney to make sure the paperwork is done right and you’re protected.
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Mortgage Loans 101 Municipal grant and state housing programs
Little money down. Often below market interest rates. Down payment grant may be forgiven if you stay in the home for a few years. These programs often have FHA loan underwriting.
Read the fine print. There may be a payback penalty if you move out early. You may not be able to rent the property if you can’t sell it. Grants may apply to targeted areas only. Must be a first-time home buyer.
Home equity/second mortgages
Home equity loans can make a good home purchase loan if all you need is short-term funds (5–15 years). Closing costs are cheap, and interest rates are low.
Look closely at the variable rate schedule. These loans often have low teaser rates. A fixed rate may be better if it’s equal or better than the current conventional interest rate.
The Wholesale Sector On the wholesale level there are three large publicly traded companies, Federal National Mortgage Association (called Fannie Mae in the industry), Federal Home Loan Mortgage Corporation (called Freddie Mac), and Government National Mortgage Association (called Ginnie Mae). There are also a host of other money sources like banks, insurance companies, and pension funds that buy mortgages. Since Fannie Mae and Freddie Mac buy close to 50 percent of the mortgages written, their underwriting standards are what the rest of the industry follows if they want to sell the loans they originate. You might say that the Fannie Mae/Freddie Mac combo is to mortgage lending what Microsoft is to computing. Fannie and Freddie package these loans into mortgage-backed securities that are sold to investors. The money from the sale of these securities enables them to continue buying mortgages from lenders. If you were to call your favorite stockbroker and buy shares of Fannie Mae stock, your investment would be backed by millions of home mortgages. This cycle is what gives homebuyers a plentiful and consistent flow of mortgage money at reasonable interest rates. Their track record over the past few decades is impressive in creating a good flow of mortgage funds at competitive interest rates that otherwise wouldn’t be possible.
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A Survival Guide for Buying a Home
Another corporation, Government National Mortgage Corporation, buys Federal Housing Administration (FHA) and Veterans Administration (VA) government guaranteed loans from lenders. These mortgages are also packaged and sold on the securities market, ensuring a continuing flow of funds for FHA and VA loans. In mortgage-speak, the wholesale mortgage industry is referred to as the secondary market. In addition to the big mortgage buyers mentioned above, many banks and other money sources buy or make mortgage loans for their own portfolios; this is called warehousing the loan. Also, if a loan meets with Fannie Mae or Freddie Mac underwriting standards, it is called a conforming loan. If it doesn’t meet these standards, it is a nonconforming loan.
Conventional Loans Conventional mortgages, in contrast to FHA and VA guaranteed loans, are bought by Fannie Mae, Freddie Mac, or another financial institutions like a bank, credit union, or insurance companies. Because the secondary market is big and diverse, with a plentiful supply of funds to loan homebuyers, conventional mortgages have a lot of pluses such as: They’re available through a variety of financial sources throughout the country and on the Internet. If you have a 20 percent plus down payment, you don’t have to pay the mortgage insurance or funding fees that FHA and VA government programs charge. You have a sizable buffet of loan options and programs to choose from. Loan limits or the amount of money you can borrow are much higher than government guaranteed FHA and VA programs. Currently, Fannie Mae and Freddie Mac’s maximum loan amount is $322,700, although in 2002 their average loan was considerably less at $139,300, according to their Web site. If you can’t qualify for a conforming mortgage, there are many smaller lenders who specialize in subprime or A-, B, C, or D loans. With subprime loans, the further down the alphabet you go, the higher the interest rate and loan costs go because the lender’s risk increases.
Mortgage Loans 101
25
But, this is not all bad. Many borrowers who have to start out with an alphabet loan can rebuild their credit and refinance with an ‘‘A’’ loan after a few years.
Bigger Homes Need Bigger Loans If your dream home needs financing over the Fannie Mae or Freddie Mac $322,700 loan max, you’ll have to go with a mortgage lender who does nonconforming (outside Fannie Mae guidelines) jumbo loans. These loans cost about .5 percent more than conforming programs. These players in the mortgage secondary market are typically insurance companies, banks, savings and loans, credit Secondary market. Inforunions, pension funds, etc. Many of these mative Web sites for the niche lenders make direct loans for their biggest mortgage buyers own portfolio and have their own under- on the secondary market: writing standards and loan limits. www.fanniemae.com You can also finance a jumbo mortgage without paying a higher rate by tak- www.freddiemac.com ing out a first mortgage at the Fannie Mae www.ginniemae.com loan limit and then getting a second mortgage to cover the rest of the purchase price. Even though second mortgages typically carry a higher interest rate than a first mortgage, they’re generally for a shorter period of time— say, 10 years. When you average the two rates, it’s usually cheaper to get a conventional first mortgage and a more expensive second mortgage than it would be to get a long-term jumbo loan.
FHA Guaranteed Programs The federal government’s Federal Housing Administration (FHA) guaranteed loans are one of the best ways for first homebuyers to get a home. Their programs are a little more flexible in seller, family financial contributions, and underwriting standards than Fannie Mae or Freddie Mac loans. A nice thing about FHA loans is that family members can give you the down payment and closing costs to help you get a home. For them to do this, they have to write a letter stating that the funds are a gift and the source must be verifiable. For instance, if Aunt Josie wants to gift you the down payment she has to write a letter to the lender on her pink stationary saying the funds are a gift and sign it. Second, the
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A Survival Guide for Buying a Home
funds should be in her bank account so that the lender can verify they exist. The FHA gets very upset if the sellers try to slip the buyers a kickback so that The FHA site. Check out they can buy the home with nothing FHA loan programs and indown. This is called loan fraud, and it’s a federal offense. formative home buying inThere are however, two limiting areas formation at with FHA loans. One is low loan limits www.hud.gov. You can that vary from county to county in each also look up the loan limits state. And second, mortgage insurance of for your state and county. approximately one-half percent is added to the interest rate on all FHA loans, regardless of down payment. In reality, many homebuyers get a home with a low down FHA loan and then refinance with a conventional program when they can create enough equity to drop off the mortgage insurance. One interesting FHA loan is its 203(k) program. This option allows you to buy a fixer-upper and combine the fix-up costs and purchase price into one 30-year loan. If you’re handy in the building trades or have relatives you can tap, this can be a great way to get a first home.
Department of Agriculture Loans The Department of Agriculture, through its Rural Housing Service (RHS), offers low-interest loans with no down payments on its Section 502 programs for families buying a home in rural areas. To be eligible for these programs, your income may not exceed 115 percent RHS loans. Check out RHS of the median income for the area, and you must not be able to qualify for a loans and income limits for mortgage from other sources. your area on www.rurdev RHS has two basic home buying pro.usda.gov. grams. One is a guarantee program similar to FHA and VA loans in that RHS does not loan directly but guarantees the loan written by other lenders. The other, aimed at very low-income buyers in the 50 to 100 percent of the area median income, is a direct loan program.
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The interest rates for these loans are set by RHS, with a subsidy that insures a family does not pay more than 26 percent of its income for the total house payment.
VA Guaranteed Loans The Veterans Administration offers government guaranteed loans to veterans from World War II through the second Gulf War. Many National Guard members and reservists are also eligible for the no-downpayment mortgages. Generally, Guard members and reservists who were activated for the Gulf War after August 2, 1990, are eligible for a VA guaranteed loan if they were on active duty for 90 days or more and were honorably discharged. Peacetime veterans are also eligible if they served at least six years. The biggest advantages of VA loans are you don’t need a down payment and the sellers can pay all the closing costs for a true nothing down deal. Also, there are no mortgage insurance fees, although the VA does charge a 2 percent funding fee. However, that too can be paid by the seller as part of the closing costs. Qualifying can be more flexible than other mortgage programs, and if you run into problems with a job loss later on, the VA is more willing to help. Disadvantages are that the loan limit tops out at $240,000, and if you reuse your eligibility, the funding fee goes up depending on your down payment. Of course, if your down payment were 20 percent or more, conventional financing would avoid both.
Funding Fee and Mortgage Insurance In reality, another downside of VA financing is getting the seller to pay the veteran’s loan costs in a hot market. Sometimes these costs can be added to the sales price, but inflating the value can create appraisal problems. An example of this dilemma is the case of Dave, a Gulf War veteran, and his wife Amanda, who wanted to use a VA guaranteed loan to get their first home. Although their credit was great and Dave and Amanda prequalified for $175,000, the hardest part came in finding a seller who was willing to pay their loan costs of more than $8,600. While the market in their
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A Survival Guide for Buying a Home
area was stable, finding a home with sellers motivated enough to discount their home an additional 5 percent was a challenge. After two months of looking and several rejected offers, Dave and Amanda found a home where the owners were getVA Mortgage programs: ting a divorce and for a quick sale finally You can get more informaagreed to pay $6,000 toward buyer closing costs. That left $2,600 that Dave and tion on VA loans and beneAmanda needed to come up with to close. fits by calling 800-827-1000 Even though they didn’t get into a home or going to Web site www for zero down as they had hoped, VA fi.va.gov. nancing did enable to them to buy a home for a smaller down payment than other loan options would have. The bottom line is that for a veteran needing to get into a starter home with little or no down, a VA loan is hard to beat. But expect some tough shopping if it’s a seller’s market and seller concessions are hard to come by.
State and Local Housing Programs Nearly every state and many cities have housing agencies with programs designed to help first-time homebuyers get into a home. State housing authorities sell bonds to raise funds for their loan programs that offer mortgages 1 to 3 percent less than State and local mortgages: the going market rate. These programs You can get a wealth of inrange from down payment grants and formation on your state loans to lower than market interest rates. Most combine grants with FHA or VA and local programs by loans to lower the down payment and going to www.hud.gov/ closing costs. local/index.cfm. However, there are restrictions to these loans you should be aware of, so it’s important to read the fine print. Typically, you must live in the property, and if you move or get transferred, you can’t rent it. Also, the down payment subsidy isn’t completely forgiven until you’ve lived in the house for three to five years, depending on the program. If you want to sell before the date in your contract, you may have to pay back part of the grant.
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Depending on the area and program, if you’re blessed with a hot market and you want to sell for a profit, the housing authority may want some of the subsidy back. Still, if you have little or no money down, one of these programs can be a good way to go. It’s certainly better than renting, but be sure you understand the strings attached.
Seller Financing Occasionally, you’ll find a seller who is willing to play banker and carry the financing. This can be a great win-win for everyone if it is done right. The buyer can save thousands of dollars in bank closing costs, and the seller can get 4 or 5 percent more return than if she put money from the sale in CDs. From a paperwork standpoint there’s not much difference between a bank and an individual seller being the investor. How do you find these deals? If you’re shopping through the newspapers, the owner will usually advertise ‘‘owner financing.’’ You can also ask the owners when you call about a property if they’re interested in carrying the financing. Also, properties listed on the realtor’s Multiple Listing Service (MLS) will disclose if the owner is willing to consider carry back financing. Seller financing has gotten a bad rap in some areas because some owners have targeted people who can’t buy a home through normal means. They offer these buyers a chance to buy a home they otherwise couldn’t qualify for but charge them high interest rates with balloon payments, a scam created to get a higher cash flow from the property than renting would generate. Many times the buyers can’t meet the unrealistic terms, so the owner repossesses the home, puts it back on the market, and the cycle continues. A variation of this scam involves a lease option, where the seller charges a high monthly payment but agrees to credit part of the rent back to the buyer for a down payment sometime in the future. The scam enters in when the seller creates terms he knows the buyers can’t possibly meet so that they will never get the credit. Still, seller financing can be good for both buyer and seller if it is used correctly. For instance, one investor, taking a long-range strategy, bought seven homes over a 10-year period and concentrated on paying them off during his working years. When he reached 65 and retired, he sold the homes and carried the financing at the same interest rate and 30-year terms a bank would. The interest alone from the notes he
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A Survival Guide for Buying a Home
carried on the properties generated several thousand dollars a month in retirement income. Buying a home with seller financing can be much simpler than dealing with a bank’s paperwork, and saving about four thousand dollars plus in bank closing costs doesn’t hurt either. Still, it’s best to have an attorney look at the deal before you commit. Take comfort that spending a few hundred dollars in attorney’s fees is a lot less than paying bank closing costs and being taken advantage of. More tips on finding these deals are covered in Chapter 4.
Third-Party Down Payment Programs In recent years, several nonprofit organizations have created opportunities for homebuyers to buy a home for little or no money down. Two typical programs, the Nehemiah Program and Neighborhood Gold Program work with FHA, conventional, and subprime lenders to gift the down payment and closing costs. These programs basically work in the same way. The home seller contributes up Third-party gifts: Two of to 7 percent of the sale price. Three perthe best Web sites for third- cent goes toward the down payment, apparty gift programs are proximately 3 percent toward closing costs, and up to 1 percent to the sponsorwww.thebuyersfund.com ing organization. and www.getdownpay From the seller’s view, these programs ment.com can widen the buyer pool to include those with low or no down payments. But, there’s a price. The seller in effect discounts the home’s selling price by the contribution. In a slow market, such concessions are often necessary in getting the house sold. However, in a hot market, persuading the seller to give up a steep discount may be difficult. In addition, increasing the price 7 percent or so can create appraisal problems. In many of these situations, a compromise is reached. The sales price is increased as much as the house will appraise for, and the seller kicks in the rest. From the buyer’s side, the down payment gift is not always free, because the sales price is higher. The seller concession goes to down payment and third-party fees, but you end up with a higher mortgage loan than if you had negotiated a lower price. The bottom line on no-down programs is that they will get you in
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a home, but you’ll pay for it in a higher sales price and/or mortgage. Does this mean you shouldn’t buy a home with these loans? Not always. If the alternative is paying off the landlord’s mortgage, then going this route can be a plus—as Anthony and Sandra found out when they bought a home on the Neighborhood Gold Program. Because it was a buyer’s market, Anthony and Sandra had a good selection of homes in their price range to consider. They looked at about twenty homes before zeroing in on a cute, well decorated bilevel. To get the ball rolling, their realtor presented a full price offer but attached an addendum requiring a $9,240 concession for gift down payment financing. The sellers weren’t too happy with the offer, but with stiff competition in their price range plus a job transfer looming, they knew they would have to make some concessions. The sellers’ agent felt that increasing the price $3,700 would be about as high as they could go and still have the home appraise based on recent comparables. This would effectively reduce the sellers’ concessions to $5,540, an amount they could live with. Since this was the best home Anthony and Sandra had looked at and they loved the area, they accepted the counteroffer increasing the price. It’s true that if they had saved up a down payment, they could have easily bought this home for $5,500 less than the asking price. That would have reduced their monthly payment $33.00 or $11,800 over the next 30 years. But as Anthony and Sandra looked at it, that $33.00 a month was paying off their mortgage and building equity in a home, not going toward rent payments.
Understanding Points and Buy-Downs Points are prepaid interest. Each point is equal to 1 percent of the loan amount or $1,500 on a $150,000 loan, for example. Bankers, mortgage lenders, builders, homesellers, or anyone else can pay points so that they can offer lower interest rates and be more competitive. For instance, a car dealer may advertise a lower than market interest rate on a new car model, which means, as you probably guessed, that the dealer has made an agreement with the bank and paid points to get a lower rate. A new homebuilder does the same thing to get a lower rate on mortgages they advertise on banners and flyers at their home site. As a homeseller you can do the same by offering to pay points on a buyer’s behalf so that they’ll buy your home.
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The bottom line is that points cost you money. Sometimes for good, other times not. If you understand points, you can work with them for your advantage and not get taken in.
How Points and Buy-Downs Work When you call a mortgage banker about a home loan, it’s likely the lender will reel off a whole smorgasbord of interest rates. In addition to that day’s interest rate (par), the lender will also give you the choice of several lower rates if you’re willing to pay points. In this case, loan discount points are paid to the lender at closing to buy down the current interest rate, a rate that—along with the points—can change from day to day as the money markets fluctuate. As mentioned, a point is one percent of the loan amount and is interest paid up front to increase the investor’s yield or profit on the loan. For example, if you call a mortgage lender for the current rate, you might get 6.0 percent at par and 5.75 percent if you pay two points. On a $100,000 loan, this would add $2,000 to your closing costs to buy the interest down .25 of one percent for the life of the loan. Points are normally charged by mortgage lenders to increase their up-front profit and offset the uncertainty of a loan that would normally go 15–30 years. However, since few mortgages go full term anymore because of sale or refinance, points can be an attractive incentive for investors to invest in mortgages. As a rule-of-thumb, each point is approximately equal to 1/8 percent (.125) when buying down the interest on a 20- to 30-year mortgage. However, in a competitive market, if you shop around, it’s possible to find discounts as high as .25 percent per point. Plus, how long you want to lock in the rate is also an important factor. A 30-day lock will have better terms than a 60-day one. You usually have two choices when you begin the loan process: You can lock in the interest rate and points for thirty to sixty days. Or you can ‘‘float’’ and take whatever the market is the day you close. If you like to gamble and the rates are falling, this can be a good way to go. But, if you don’t want to take the chance of getting caught by an upward spurt in interest rates, then locking the rate is the safest bet. When a builder or seller offers to pay the bank a point or more to lower your interest rate, it’s called a buy-down. Often builders increase the price of the home so that they can advertise an attractive interest rate. As a consumer, it’s a good idea to ask the lender or salesperson how many points are built into the price of financing when the interest
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quote is lower than the current rate. There’s no ‘‘free lunch’’ in mortgages. If you find an interest rate less than the current rate, someone is picking up the difference, and that’s usually you. Buy-down programs are varied and limited only by the lender’s imagination. In addition to permanent buy-downs, there are threetwo-one and two-one programs. With these temporary buy-downs, the interest rate is typically 3 percent less the first year, 2 percent less the second year, and 1 percent less the third year. After the third year, FIGURE 2-2 Point and buy-down options. Options
Pros
Cons
You pay points to lower your interest rate. (Each point equals 1 percent of the loan amount.)
Each point lowers your interest rate approx. .25 percent. This works best in times of high or rising interest rates.
If you live in the home for less than 3–5 years, you may not recoup the money you spent on points.
Seller pays points to buy down your interest so you’ll buy the home.
If it’s free, taking the buy-down is better than subtracting the concession from the sales price.
When the concession is added to the sales price, you don’t gain anything.
Seller pays points to buy down your interest so you can qualify for the loan.
If your ratios are borderline, this concession can give you a loan approval.
In this case, without the points, you don’t get the loan.
Builder pads the price with a few points and advertises a lower interest rate than everyone else as a sale gimmick.
If the points are added to the price, it’s not a real concession. Ask the builder if the price is the same without the points.
You pay for a something that may not help you, especially if you move before the break-even point.
Lender advertises a lower rate but charges points to get it.
Sometimes it’s a good deal, but you’ll have to do the math by comparing payments with points and without points added in to know.
If you don’t do the math, you may be adding to the lender’s profit margin.
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the interest rate levels off for the remainder of the loan. And the twoone buy-down has only two years of reductions before it levels off. Temporary buy-downs can be a two-edged sword. If the bank qualifies you on the first- or second-year rate, you’ll be able to buy more home with the hope that your income will go up in the next few years to cover the increasing payments. A miscalculation of your future income or being overly optimistic can mean an uncomfortable payment increase each year for two or three years. On the positive side, you can often qualify for more house using a buy-down. In a slow market sellers may be willing to pay a few points to help you buy their house if your qualifying ratios are tight.
Is Paying Points Worth It? It all depends on how long you’re going to be in the house. Usually, if you plan on staying four or more years, then points can save you money. To determine how many months until you break even, subtract the payment if you buy down the rate from the payment if you don’t buy it down and divide by 12. For example, on a $100,000 loan at 6 percent for 30 years, the payment is $599.55. But, if you pay $2,000 and buy the rate down to 5.75 percent, the payment is $583.57, a difference of $15.98 a month. (Incidentally, if you had subtracted the $2,000 and gone with a $98,000 loan instead, the payment would be $587.56, about $3 more.) Dividing the $15.98 monthly savings into the $2,000 point cost shows that it will be about 125 months before you break even and start saving $15.98 a month. This is hardly a barn-burner investment, but if you keep the home for the full 30 years, the savings will add up. However, most financial advisers don’t recommend going beyond 36–48 months to recoup your point costs. It’s interesting to note that in the above example, if the interest rate were 9 percent, buying the rate down to 8.75 percent would result in a 112-month breakeven. The higher the interest rates goes, the more attractive points become in saving you mortgage interest. The bottom line is that points are usually not a good investment as you can see from the numbers in the above example. However, if points are part of a seller or builder concession, it’s better to take the buy-down than to subtract the concession from the sales price.
All About Annual Percentage Rate (APR) There’s the interest rate quoted, and then there’s the real interest rate you’ll be paying on your mortgage. When you take the quoted interest
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rates and add in all the costs associated with getting that loan, a different and higher percentage number results. This higher number is called the annual percentage rate or APR for short. Federal law requires that all lenders provide the APR and a breakdown of loan costs to borrowers within three days of receiving their loan application. In reality, this law has created a great loan comparison tool. You can have two lenders, A and B, quoting the same interest rate on the phone, say 6.0 percent. But when you get their APR statement in writing, lender A may be 6.48 percent APR and lender B 6.37 percent. This tells you that lender A’s loan is more expensive than that of lender B, and that lender A has added in more or higher fees. Different loan types generate different APR levels. For instance, FHA loan APRs are about a half-percent higher because of the built-in insurance premium than most conventional APRs quote. Likewise, a 20 percent down conventional APR is lower than a 5 percent down loan because of the mortgage insurance. So when you compare loans using APR, it’s important to compare similar programs with the same down and loan type. For example, suppose you call two mortgage brokers and ask them to fax you a quote on a 30-year, $150,000 conventional loan with 20 percent down. Lender A tells you it has a special rate today, only 5.95 percent. Lender B tells you that today’s rates are the lowest this week and quotes 6.0 percent. A short time later you get both lenders’ faxes. Lender A, who quoted 5.95 percent, has an APR of 6.15 percent. Lender B also comes in with an APR quote of 6.15 percent. How can this be? It all comes down to the loan fees. Lender A’s fees totaled 0.20 percent or $3,000 because it wanted the competitive low interest quote and hoped to make up the difference up in loan fees and a small buydown. Lender B, on the other hand, took a different approach. It felt that the APR would ‘‘tell the tale’’ in the end, so it might as well quote the real par rate and go with 0.15 percent loan fees or $2,250.
All About Private Mortgage Insurance (PMI) One of the ways our country’s financial system has enabled almost 65 percent of households to own their own home is through Private Mortgage Insurance (PMI). It makes it possible for homebuyers to get
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into a home for 3 percent or less. So how does PMI work to accomplish this? PMI is an insurance policy issued by private companies that insures the mortgage against default. There is usually some kind of mortgage insurance on any loan that is more than 80 percent of the purchase price. An 80 percent loan on a $150,000 house, for instance, would be $120,000, and your down payment would be $30,000. Or, in other words, any loan with less than 20 percent down will generally cost you a PMI fee. Lenders feel that a loan with 20 percent or more down payment is not a risk if they have to foreclose. There’s enough equity to absorb any loss from the process. Bankers use the mortgage-speak term loan-to-value or LTV when taking about this ratio. In the above example, the LTV would be 80 percent. The value can be the sales price, appraisal, or other criteria. If you’re buying a home, the LTV would be based on the appraisal. A second mortgage loan might be based on a percentage of your equity. Or a small lender might go with a percentage of your county tax assessment value.
How Much PMI Adds to Your Monthly Payment The cost of PMI is based on the LTV. A 95 percent loan costs more than an 85 percent loan. The premium is charged monthly and added to your payment, along with taxes and homeowners insurance. Typically, the PMI premium costs .75 to .92 percent, with 5 percent down payment. A 10 percent down payment drops the PMI to .50 to .68 percent. The exact percent you pay depends on your credit score. For example, when Isadoro and Maria bought a $129,000 home, FIGURE 2-3 Typical PMI premiums on a $100,000 mortgage. (Your actual PMI premium may vary depending on your credit and qualifying ratios.)
Your Down Payment
PMI Percent
Monthly Premium Cost
5 percent down
0.75 percent
$62.50
10 percent down
0.50 percent
$41.67
15 percent down
0.30 percent
$25.00
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they put 5 percent or $6,450 down. At 6.25 percent interest, their monthly payment was $754.56. Since their loan was a 95 percent LTV, the lender charged them a .092 PMI fee. This translates into $754.56 .092, which equals $69.42 added to their monthly payment. If Isadoro and Maria had put 10 percent down, the PMI factor would have For more information on dropped to 0.068 or $51.31 a month. Of course, if they could have come up with PMI, check out www 20 percent down, there would have been .gehomenow.com and no PMI. www.privatemi.com. The bottom line is that PMI is an insurance policy separate from your mortgage. When you’re shopping for a lender and comparing costs, don’t forget to compare PMI fees. They are negotiable because PMI companies are usually separate entities, and they’re competitive. Mortgage insurance is an important part of the home buying process. It gives you an opportunity to buy a home without saving up a big down payment. If the alternative is renting for years while saving for a down payment, it’s a great bargain, because in those years you can be paying off a mortgage instead of paying a landlord.
Getting Rid of PMI As Quickly As Possible In 1998, Congress passed the Homeowners Protection Act that requires lenders to drop PMI when a loan balance is paid down to 78 percent of the purchase price. This seems straightforward enough, but how long would it take to pay down a loan to the 78 percent level? In the above example, Isadoro and Maria would need to pay their loan down to $100,620. If they made just the required payments with no extra paid on the principal, they would reach that level in about 11 years and have paid $9,094 in PMI fees. To get around this, many homeowners ride the appreciation tide and refinance when they can get a high enough appraisal. In a hot market, this can happen in a year or two. So that you don’t miss out, keep track of the sale prices of homes similar to yours in the area. Call the realtor who sold you the home and get a printout of recent sales every few months. Also, if you refinance or pay off an FHA loan and some conventional programs in the first five years or so, you may get a refund on some of your PMI costs. Your mortgage lender should be able to give you the information you need to apply when you refinance.
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Piggyback Loans: A Way Around PMI? Some lenders offer a low down piggyback or 80-10-10 loan program as way to avoid PMI. These programs stack an 80 percent first and a 10 percent second with a 10 percent down payment. The 10 percent second usually carries higher rates for a shorter term, typically 10 to 15 years. Whether these programs save you money depends on long you stay in the house. Since the average length of a mortgage is now less than six years before payoff or refinance, it’s hard to justify going this route. Before committing, do the math and see where your break-even point is.
Loan Payment Options Each of the different loan programs, be they conventional, FHA, VA, or whatever, have a menu of payment options. Fixed, variable, balloon, and biweekly are the most common options we’ll take a look at here.
Fixed Rate The most popular payment choice is still the fixed, 30-year amortized mortgage. (Amortized is mortgage-speak, meaning the monthly payments reduce the loan to zero in the time agreed on.) If you qualify, you can also go 15- and 20-year payoffs and save big bucks in interest. In the last couple of years, many homeowners who bought their home on 30-year loans got a great deal refinancing. Dramatically increasing home values and falling interest rates enabled them to refinance to 15-year loans, get rid of PMI, and keep their new payments close to their old ones. Interestingly, payments over 15 years are not double a 30-year loan but are about 30 percent higher. This is because 15-year programs usually get a half percent discount, and the mathematical fact that 30year mortgages have more years of front-loaded interest payments. For example, a $150,000, 6.15 percent 30-year mortgage has a $913.84 monthly payment. Reducing the term to 15 years increases the payment to only $1,237.60, with a half percent discount. You will also save $106,214 in interest by taking a 15-year rather than a 30-year loan.
Adjustable Rate Mortgages (ARM) Adjustable rate mortgages differ from fixed rate options in that the interest rate typically changes every six months or one year, depending
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on the program. The interest rate is tied to a popular financial index such as the Treasury bill index or a Cost of Funds Index (COFI). If the index goes up, your payment goes up; if the index goes down, your payment goes down. Not knowing what your payment is going to be next year can be scary. But, ARM loans: A good site covthe wise people of the mortgage industry knew that consumers would be wary of ering the details of ARM such a loan, so they added caps. In mort- loans is www.countrywide gage-speak, caps or cap rate means that .com/purchase/hb_pro your interest rate won’t go up more than grams.aspadjustable_rate 1 or 2 percent in any adjustment period or above a 5 to 6 percent ceiling for the life of the loan. The payment is recalculated each adjustment period using the new interest rate and the remaining years of the loan. So why would you want to go with an adjustable loan? One advantage of ARM loans is that the interest rate starts out 1 to 1.5 percent less than fixed rate. If your adjustment is yearly, that means you get one year of lower rates before the bank recalculates your payment. When you add in a 1 percent cap, you’ve got a deal for the first year. If it takes another year to get up to par, you’ve gotten a good deal for two years. After that your payment depends on the financial index your loan is tied to. Because of lower initial payments, you can sometimes qualify for a better home. If your income is going up or you’ll only be in the home for two to three years, then ARMs can be a good way to go. Some lenders even offer hybrid loans that start out at an adjustable rate and then convert to a fixed rate down the road, in usually five years or less. Hybrids can be a good way to go by giving you the best of both options. These programs are more complicated, so it’s important to look at the APR and cap terms carefully. Many buyers who don’t feel comfortable with adjustable rate loans use them to get into a home and then refinance to a fixed interest rate as soon as possible. If values go up and interest rates drop, refinancing to get rid of PMI and the adjustable payment can be a double plus. The bottom line on adjustable loans is to think short term. If interest rates are high, you’ll get an interest break for a year or two while you hope for better times. If your qualifying ratios are tight, an ARM may help put you over the top in getting your dream home.
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A Survival Guide for Buying a Home
Loans with Balloon Payments In mortgage-speak, a balloon payment is where the loan balance is due in a lump sum at a future date. These loans are usually short term, 10 years or less, and sometimes require at least a monthly interest payment, while others have accrued interest due at the end. Loans with balloon payments are usually put together with the idea of refinancing in the near future. A common example is the construction loan taken out to build a home, which is then refinanced once the house is finished. Also, some home equity credit lines and second mortgages have the balance due in 10 to 15 years, with only a minimum interest payment due each month.
Bi-Weekly Payment Options An interesting conventional payment alternative is making two half payments each month. If your pay period is every two weeks, there are programs where you can pay half the payment on the first and the other half on the fifteenth of the month. Most lenders that offer this option require an automatic deduction on your checking account. For example, Wes and Lynne went with this option when they bought their townhouse and financed $275,000. Since both their paychecks were direct deposit and bimonthly, they felt that this was a way they could put their mortgage payments on autopilot, save interest, and shorten their loan, too. For Wes and Lynne, this is how it worked. Monthly principal and interest payment was $1,693.22. One half, $846.61, was taken out on the 5th of month and the balance $846.61 on the 25th. In effect, they were making two extra payments per year with this system. This would result in paying off a 30-year loan in 24.35 years and saving $74,329 in interest. Fannie Mae and Freddie Mac, as well as many other investors, have bimonthly payment programs available. Although not as popular as standard fixed and variable mortgages, the bimonthly programs can be a great way to go. The key question is, can you consistently have the funds in your account those two times a month the bank deducts them?
No Doc or Low Doc Loans Self-employed, commissioned, or others who don’t have a regular paycheck usually have a harder time getting a loan. Sharply honed skills getting the most out of Tax Schedule C becomes a two-edged sword,
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because the lender looks at the bottom line after all the business expenses are deducted. The depreciation and home office expenses that look so good on April 15 now slice away on the mortgage you can qualify for. The conforming mortgage system is set up to process a couple of years of tax returns or W-2 forms, one or two recent pay stubs showing year-to-date, and a list of account numbers. If the data fits neatly in all the round holes, then approval follows. But, anything outside this conforming profile triggers a yellow penalty flag floating to the turf. Self-employed Aaron and Sarah found this out when they outgrew their home office and wanted to move up to a bigger home. Although their nine-year-old business was successful and had a great track record, their tax returns ruled out a conventional mortgage. Aaron and Sarah’s mortgage broker knew several investors who bought stated income or nonconforming low/no doc loans. That’s mortgage-speak for loans that require the borrower to submit few or no financial documents. These types of loans are made almost solely on the basis of the credit report. Sometimes the investor wants to see a couple of years of tax returns to make sure you’re real and that the loan request is within the bounds of reality. Mortgage investors have learned that self-employed buyers with good credit and a business track record work extra hard to protect their credit. As a result, there’s an active and competitive market for stated income mortgages. In Aaron and Sarah’s case, their credit was excellent and their business was seasoned, so they were able to get a $225,000 loan with 10 percent down. Their interest rate was 0.75 percent higher than a conforming Fannie Mae Web site for no/low doc rate, which translated into $110.36 more a month. Still, Aaron and Sarah were happy loans: www.country with their new loan, and they were able to wide.com/purchase/ close in less than two weeks because there l_loantypes.asp wasn’t a lot of paperwork to process. The bottom line on low/no doc loans is that they’re credit driven and have higher interest rates to balance out the investor’s greater risk. They’re a great way to go if you’re selfemployed, on straight commission, or want a quick, streamlined loan. Down payments on these programs range from zero down to 25 per-
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A Survival Guide for Buying a Home
cent or more and interest rates are typically 0.75 to 2 percent higher than par.
Locking In an Interest Rate In a market where interest rates are low and stable, locking in the rate and terms for a month or so until you close seems like no big deal. However, if interest rates are unstable and going up, locking in the rate can easily mean the difference of a fourth or half percent in your payment. On a $150,000 loan, that can translate into a $50 to $70 a month increase. Locking in an interest rate means that the lender agrees to lock in the interest rate for a set period of time, usually 30 to 60 days. If the market goes up, you’re locked in for the agreed on period. Likewise, if the market drops, you pay a higher rate, although some lenders may offer a float down option that lets you get a lower rate if the market drops. Dos and don’ts of locking in a rate 1. Get the lock in writing. 2. Lock in the rate, points, and any other costs you can. 3. Lock in the rate on application rather than approval, especially
if the market is volatile and going up. 4. When you shop for a loan, make sure you understand the lend-
er’s policy on lock and if there’s a lock-in fee. Some lenders charge a fee, while others don’t. 5. Make sure the rate lock is long enough to close, but not so long
that it costs you a fee. Another option is not to lock in a rate and float with the market. Your interest rate is what the market is the day you close. In a market with falling rates, this is the best way to go. In an inflationary market of rising rates, locking in the rate becomes the better route.
Sources of Down Payment Coming up with a down payment is usually the biggest hurdle for first-time homebuyers, although many new mortgage programs and changes have made getting it easier. Along with the Nehemiah, VA,
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and Neighborhood Gold programs discussed earlier, these ideas hopefully will spark sources you can tap if you’re short a down. While there are lots of creative ways to come up with a down payment, there are also a few fraudulent practices you’ll want to avoid. Here is a case in point. An agent presented an offer on a home in an older neighborhood, one of the smaller houses in the area, with only a carport. Most of the other homes had been upgraded and had double garages added. Taking advantage of the potential to increase the home’s value, a buyer made an offer $20,000 over asking price with the money going to a contractor at closing for a new garage and some kitchen upgrades. The contractor’s bid was attached to the offer. The lender’s appraiser agreed that the upgrades would increase the value on his report, so the lender approved the loan. The sale closed and the title company paid the $20,000 from the loan proceeds to the contractor to do the upgrades. Later it was found that the buyer was the agent’s sister and the contractor never did the work paid for. It was a scam to get the property for nothing down and get enough cash to buy still another property. The trio involved in the scam faced federal charges, because the loan was a government guaranteed mortgage, as well as state charges for fraud. Another fraudulent practice to avoid is writing two contracts on one property, one for the mortgage lender with an inflated price high enough to cover the down payment, and the other between buyer and seller spelling out the real sale terms. The seller rebates to the buyer enough money to cover the down payment and get the house with no money down. If an unscrupulous lender or appraiser suggests this approach, it’s not only fraud, but also a federal offense. That means there are hefty federal penalties if your transaction gets a random audit and irregularities are found. It’s just not worth it to try and fake a down payment that doesn’t exist. It only adds more controls and paperwork buyers have to go through and ends up costing everyone higher fees.
Zero-Down and Low-Down Strategies True, there are zero down or 100 percent loans. But they’re going to cost you a percent or two higher interest and heftier closing costs. A less expensive way, when the sellers don’t need all their equity out, is
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to have them lend you anywhere from 5 to 20 percent of the sales price in the form of a second mortgage. This gives you the down payment you need, and the bank lends you the balance. This approach obviously works better in a slow market, where some sellers need to sell and are willing to carry back a note. A 20 percent seller carryback would also allow you to go with an 80 percent loan and avoid the PMI fees. For FHA and some conventional mortgage programs that require only 3 percent down, you can often get the seller to discount the selling price as a concession that covers much of your costs. Of course, the success of going this route is also dependent on market conditions. The slower the market, the more successful this type of offer. FHA insured loans allow parents or a close relative to gift part or all of the down payment. If the buyer’s income or credit is weak, parents can also be a comortgagor (cosigner) on the loan to get the kids a home. You can even borrow a down payment using a hard asset such as a vehicle for security if the payments don’t put your ratios over the top. Other sources to borrow from could be other relatives, insurance policies, stocks and bonds, employment programs, or even equity from another property.
Using Your 401(k) or IRA Special provisions allow you to withdraw funds from your IRA before you reach age 59 1/2 and not be subject to a 10 percent early withdrawal tax penalty when you purchase a first-time home. The rules are: You may take out up to $10,000 from your IRA once in a lifetime to buy a principal residence for yourself and a spouse, child, or grandchild, or your spouse’s child or grandchild.
Check out Web site www .investsafe.com/house financing.html for information on using IRAs and other retirement funds for down payments.
The home must be a principal residence of a first-time homebuyer (someone who has not owned a home in the previous two years). If the homebuyer is married, the spouse must not have owned a principal residence during that period, either. You must use the funds within 120 days from the time you receive your IRA distribution check.
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You and your spouse can each withdraw $10,000 from your respective IRAs for a $20,000 down payment if you both qualify as first-time homebuyers.
Shopping Mortgages on the Internet The Internet hosts a dazzling array of mortgage options from small lenders to mega sites with qualifying calculators, frequently asked questions (FAQ) pages, and impressive comparison charts. These sites are great places to visit to get a feel for what mortgage options are available.
Getting a Loan Over the Internet Many mortgage sites are run by national mortgage lenders that funnel queries to their local offices. Others are Web-based mortgage brokers that work by phone and e-mail. For example, if you go to E-Loan’s Web site (www.e-loan.com/ home ) and click on the Home Purchase tab, it sends you to a window with all sorts of home-buying options. To find out what loan you can afford, click on the Get Prequalified/Preapproved box. The next window gives you four options. Click on the first option, prequalify, answer the 11 questions, and submit. After a few seconds, the results will appear in a worksheet telling you what you can qualify for, along with a breakdown of the proposed loan, along with another button you can click to start the application process. Within hours you’ll get a list of lenders’ offers and their terms. Some sites will have you contact the lender directly; others will handle the paperwork and assign you a loan officer to work with. There will be some up-front costs to get the application started. The first will be for a credit report, typically under $75. After the credit report and paperwork you Two Web site mortgage calmailed are approved, an appraisal fee of culators worth checking $500 plus or minus, depending on loan out are: type, area, and sales price, will be needed http://www.hsh.com/ to order the appraisal. hbcalc.html It’s important to remember that you should not pay any loan fees up front http://mortgageminder.com/ other than for a credit report to get a commitment. Beware of shady Web oper-
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A Survival Guide for Buying a Home
ators who quote a ‘‘too good to be true’’ interest rate and try to get you to pay a big commitment or loan guarantee fee up front. These predators are most active in subprime loans, where borrowers are unable to get financing through mainstream lenders. The bottom line is that there has never been a better time to qualify for a mortgage. With so many loan programs, liberal qualifying ratios, low interest rates, and a competitive market, renting doesn’t make long-term financial sense. The next step is shopping for a lender and getting the best deal. Chapter 3 gives you the tools to do that while saving you a few thousand dollars.
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C H A P T E R
3
Finding and Working with a Mortgage Lender
In the first two chapters we’ve covered the credit requirements mortgage lenders look for and the buffet of loan options they offer. The next step on the road to getting your dream home is to find a good lender who can put all this together with an approved loan. With that objective in mind, this chapter gives you the tools and skills to shop confidently for a mortgage lender and not get ripped off by high loan fees.
Avoiding Predatory Lenders Mortgage lending, like most other businesses, have the good, the bad, and the downright scary. Good lenders are professional, work hard to put your loan together quickly, and make the experience enjoyable. The bad lenders cost you time, money, and frustration because they don’t have the resources or competence to do a good job. Scary lenders are the worst. They’re out to make as much money as possible by whatever means possible . . . and fraud isn’t a problem with them. Borrowers who are forced to go with subprime loans are often targeted because they are more vulnerable, have limited options, and are least likely to shop around. In a nutshell, predatory lending is taking advantage of borrowers by adding nonstandard fees, overcharging on loan fees, and steering
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A Survival Guide for Buying a Home
applicants to more expensive loans when they could qualify for cheaper ones. Manuel and Geri found out the hard way about bad lenders when a relative pressured them to go with a friend in the mortgage business. They had found a cute bungalow close to their children’s school and made an FHA offer with a four-week closing date. The loan officer took their application and explained that he would need a $250 Predatory lending: For credit and application fee to get started and would get back to them in a few days. homeowners caught in a Two weeks later, when Manuel and predatory loan, Fannie Mae Geri hadn’t heard from their lender, they has refinance options in called him several times, getting a resome areas. Call their Concorded message and the usual beep. He sumer Resource Center at never returned their calls. Finally, into the third week Manuel 800-732-6643 or go to the got their lender’s home number from Web site: www.fanniemae their relative and called him. It was a big .com/initiatives/lending/ shock when he told them his company antipredatory.jhtml was not an FHA approved lender so he couldn’t do a loan for them. And they were not entitled to a $250 refund because it had been spent for a credit report and other fees. Manuel and Geri ended up losing their home purchase because the sellers had a backup offer and refused to extend the closing date. Fortunately, the buyers were able to get their earnest money deposit back since the offer was subject to financing. (When you make an offer to the sellers or their agent to show good faith, you give an earnest money deposit so that the sellers take the home off the market for a specified period of time.) Lessons learned: One, never pay more than the credit report fee up front, normally $40–$75. When the credit, income, and ratios are done and everything looks good, then pay the appraisal and other required fees. Two, not all lenders are equal. The good ones save you money, the bad ones cost you money. If a lender is a relative or friend, let them compete for your business with other companies. The old saying about doing business with friends and relatives applies even more to mortgage lending, since it’s such an emotionally charged situation.
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Prequalified vs. Preapproved There’s some confusion between prequalification and preapproval. In the first, you’ve talked to a lender in person, on the phone, or over the Internet. Based on the numbers and information you’ve provided, the lender tells you how big a mortgage you can most likely qualify for. Preapproval means the lender has checked you out and you’re good to go. To get prequalified, a mortgage lender asks you about your income, debts, and how long you’ve been on the job. Based on that information, you get a quote on the monthly payment and maximum loan you can qualify for. You can also go to a mortgage lender’s Web site, scroll to its prequalifying page, key in the numbers, and get the same information. Nothing is verified and no costs are incurred, but you know about what you can qualify for. The next step is preapproval. It requires some commitment. You are asked for all the documentation listed below and a check or credit card number for a credit report. The loan officer should get back to you in three days or less. If your application is approved subject to FIGURE 3-1 Differences between preapproved and prequalified. Preapproved 1. You’ve met with a lender and filled out an application. 2. You’ve paid the credit fees. 3. Credit and income has been verified. 4. That you have the down payment and closing costs needed has been verified. 5. You know exactly how much home you can afford. 6. The lender has submitted your loan package to underwriting and gotten approval up to your qualifying limit.
Prequalified 1. You’ve talked to a lender on the phone, in person, or filled out an Internet qualifying worksheet. Based on the information you’ve given, you’re told how much home you can afford.
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appraisal and final approval, the lender often gives you an approval letter stating the amount you’re approved for. The preapproval letter you get from the lender is an important part of your offer when you find a home. In one particular case, two almost identical offers came in on a home. One offer had a letter from the mortgage lender stating that the buyers were credit and income approved for the purchase price. The other offer had no proof that they were good to go on a mortgage loan. Obviously, it’s not hard to guess which offer the sellers went with.
Paperwork Lenders Need to Get Started Naturally, lenders will need documentation verifying your financial situation before they can give you a loan commitment. To make it easy, most if not all of these documents can be faxed. You’ll need: Your full name, Social Security number, birthday, and current address and how long you’ve lived there, along with name and address of current landlord and any others in the past two years. Most likely, you’ll also need a letter or printout from your landlord verifying that you’ve paid your rent on time and as agreed. The most recent pay stub that shows year-to-day earnings. W-2 tax forms, along with tax returns for the past two years. Your current employer, along with name, addresses, and phone numbers of employers for the past two years. Your checking, savings, and other accounts balances and account numbers. Also include a list of IRAs, CDs, stocks, bonds, insurance policies, and other paper assets. Your hard assets such as cars, RVs, lakefront property, and boats. A breakdown of money you owe, such as auto loans, student loans, credit cards, and other debt. Include name, address, monthly payments, and balances of each account. If you’re renting, include your monthly rent. If you’re self-employed or on commission, you’ll need tax forms from the past two years, plus a year-to-date profit and loss statement.
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If you are separated or divorced, include a copy of the divorce decree or separation agreement. Also document alimony or child support with a copy of the court clerk’s payments history or canceled checks for the past year. For part-time income in sales, baby-sitting, or other hard-toverify sources, you’ll need to verify on tax returns for it to be counted. Once you’ve got all the paperwork assembled and know what it will take to get a preapproval letter, the next step is find a lender. A reproducible summary checklist of items the lender needs to get started can be found in Appendix D.
How to Find a Good Lender One obvious source is to ask friends or coworkers who have recently bought or refinanced a home how they liked their lender. Other good sources are realtors and title people; they work with lenders daily and know who the best ones are because their sales depend on them. One of the best tools to narrow down lenders and compare fees is called a Good Faith Estimate. This is an abbreviated form similar to the federal Department of Housing and Urban Development (HUD) standardized form (HUD-1) that the real estate industry uses at closing. In mortgage-speak these forms are called the HUDS. The Good Faith Estimate is like half a balance sheet. On each line is printed the item, and you follow the line across to a column on the right margin that gives the cost. Along with this form and some careful shopping you can narrow down the pack fairly quickly. One home-buying couple, Peter and Angie, used a Good Faith Estimate to avoid unnecessary costs when Angie’s family pressured the couple to go with Angie’s brother, who was new in the mortgage business. Reluctantly, they agreed and filled out an application to get the process started. They were working with an agent and she suggested that they also get an estimate from a lender she had good success with on other transactions. To make a long story short, Pete and Angie got a estimate from their agent’s recommended lender and, after a little prodding, from Angie’s brother also. Interestingly, comparing the two estimates showed that Angie’s brother’s estimate was $1,200 more than that of the other lender, not
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because he was trying to take advantage of family, but because his company specialized in B loans, and that’s the loan it tried to put Pete and Angie into. The other lender, however, looked at their credit and income and felt they could qualify for an A loan. It would be a squeeze, but it was doable and would save the home buyers serious bucks. The bottom line here is to always get more than one estimate. If your brother-in-law is a mortgage lender, good. Put him on the list, and maybe he’ll shave some costs for you. But don’t assume that anyone is the best choice until you’ve shopped and compared the fees. It’s best to narrow your list down to no more than three loan officers and give them a call. They’ll confirm what you can qualify for and their figures should be in the same ballpark. Of course, the other purpose of your calls is to decide which loan officer you feel most comfortable working with so you can go on to the next step.
The Importance of a Preapproval Letter And that next step is to get a preapproval appointment with your firstchoice lender. Usually, you can do this over the phone and fax any documents the lender needs to get started. But, don’t throw away your lender list yet. Once you’ve found your dream home and know the sales price, you may want to contact these lenders again for Good Faith Estimates. But for now, you want as few credit inquiries on your credit record as possible. Before you write an offer on a house, you’ll want a preapproval letter from the lender stating that you’ve applied for a loan, your credit and income look good, and you qualify for the amount of the offer. Make sure the letter states the exact dollar amount of the offer, not the maximum you can qualify for. You don’t want to give the seller ammunition to counter a low offer. Dan and Marie did this when they bought their first home. After deciding on the lender they wanted to work with, they paid $40 for a credit report and faxed the documents needed. Within a couple of hours, their lender got back to them with a preliminary approval. There was a home in the neighborhood Dan and Marie were renting that they liked and was in their price range. Armed with a prequalified letter from their lender, they took their realtor’s advice and offered several thousand dollars below the asking price. Knowing that the sellers were unlikely to take the offer, but hoping they would counter up to their lowest price, Dan and Marie were pleasantly surprised to get an acceptance.
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The sellers, feeling the offer was a bird-in-the-hand because of the mortgage approval letter, didn’t want to risk losing the sale. Three other offers had failed when the buyers were unable to get loan approvals. Many times when that happens, the sellers get frustrated and a bottom line price that they wouldn’t go below a month earlier suffers a meltdown. It’s replaced by a let’s-just-get-this-silly-house-sold-sowe-can-get-on-with-our-life mind-set. When a seller gets to this point, it’s a great time to present an offer. Unfortunately, there’s no way to gauge sellers’ frustration levels until you sit down with them. Now that Dan and Marie knew the exact loan program and amount they needed, it was time to make sure they were getting the best deal. Calling the other two lenders on their list, they asked for a Good Faith Estimate on the sale price and loan terms they knew they qualified for. Interestingly, when Dan and Marie got the other two Good Faith Estimates they noticed that their lender was not the cheapest by several hundred dollars. First, this was obvious because their APR quote was the highest of the three bids. Second, comparing the line-by-line costs in the Good Faith Estimate revealed unusually high doc preparation, underwriting, and processing fees. This gave Dan and Marie two choices. They could go with another lender and pay for a second credit report, or they could give their current lender a chance to meet the competition. They chose to talk to their current mortgage broker and see if she would meet the lower bid. Not surprisingly, their loan officer agreed to lower her fees to keep from losing the loan.
All About Garbage Fees and Closing Costs Like any other business, banks, credit unions, or mortgage brokers can survive only if they’re making a profit. And the income of mortgage lending businesses comes from the fees they charge. Most of these fees are legitimate for a necessary service, but sometimes they’re padded, and unnecessary costs are added in. You want to root out and eliminate the padded fees as early in the process as possible. There are lots of small and not so small fees associated with getting a mortgage. These are the closing costs and other fees the industry calls garbage fees. Sometimes the line between the two becomes blurry, and the only way you can tell is by comparing fees from several lenders.
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For instance, one lender may charge a 1 percent origination fee ($1,000 on a $100,000 mortgage), a typical fee lenders charge for getting you the loan. Suppose a mortgage broker ups this fee to 1.5 percent or $1,500. This is certainly not illegal or even unethical, but why should you pay more than you have to? By comparing fees, you’ll likely find other lenders charging only 1 percent. Typically though, the ‘‘good fees,’’ if you don’t include an origination fee, will run from $600 to $975.
Using the Good Faith Estimate You’ll notice by looking at the Good Faith Estimate form (Figure 3-2) that the lines are numbered differently from a simple 1-2-3 and so on. This is because the line numbering corresponds with the numbering you’ll find on the standardized HUD-1 Settlement Statement you’ll sign at closing. As you look at lines 801 to 825, you’ll notice that this is where the mortgage company lists all its loan fees. If you were to spread out Good Faith Estimates from three lenders and compare HUD Web site: Go to www their processing, doc preparation, and un.hud.gov for great tips on derwriting fees, you would notice that the higher the fees, the higher the APR interclosing fees and paperest rate. work. For example, the interest rate on the bids could be 6.50 percent, but with the fees added in it becomes a higher APR rate of, say, 6.78 or 6.89. It’s also a good idea to have the title company, mortgage company, or whoever closes the loan fax or deliver you copies of the HUD Settlement Statement a few hours before closing. This will give you time to look over the HUDs (as they’re called in the industry) and compare them with your Good Faith Estimate to make sure the fees you agreed on are accurate. The only fees you won’t know exactly until the day you close are the proration fees. Most important are the mortgage interest computed to the end of the month, usually on line 901, and prorated property taxes on line 1004. In your area there may be other local fees on lines 1007 or 1008.
Closing Costs In 1974, Congress passed the Real Estate Settlement Procedures Act (RESPA) that requires lenders to disclose the various loan costs.
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FIGURE 3-2 Good Faith Estimate form. GOOD FAITH ESTIMATE (Not a Loan Commitment) This Good Faith Estimate is being provided by Arbor Capital Mortgage, Inc. a mortgage broker, and no lender has yet been obtained. A lender will provide you with an additional Good Faith Estimate within three business days of the receipt of your loan application. Applicant(s):
Sales Price: Base Loan Amount: Total Loan Amount: Interest Rate: Type of Loan: Loan Number:
Property Address
Preparation Date:
The information provided below reflects estimates of the charges which you are likely to incur at the settlement of your loan. The fees listed are estimates—actual charges may be more or less. Your transaction may not involve a fee for every item listed. The numbers listed beside the estimates generally correspond to the numbered lines contained in the IIUD-1 or IIUD-1A settlement statement which you will be receiving at settlement. The HUD-1 or HUD-1A settlement statement will show you the actual cost of items paid at settlement. ‘‘A’’ designates those costs affecting APR. ‘‘P’’ designates compensation to Broker not paid out of Loan Proceeds. 800 801 802 803 804 805 808 809 810 811 812 813 814 815 816 817 818 819 820 821 822 823 824 825
A A
A A A A A A A P P A A A A A A A A A A
800 901 902 903 904
A A
ITEMS PAYABLE IN CONNECTION WITH LOAN:
1000
Origination Due Lender @ Discount @ Appraisal Fees Credit Report Lender’s Inspection Fee Tax Service Contract Underwriting Review Administration Fee Application Fee Commitment Fee Warehouse Fee / Interest Differential Yield Sprd. Prem %$ Serv. Rel. Prem. %$ Origination Due Broker @ FHA Upfront MIP / VA Funding Fee MORTGAGE BROKER FEE 0–5%
1001 1002 1004 1006 1007 1008 1009
$ $ $ $ $ $ $ $ $ $ $
$ $ $ $ $ $ $ $ $ $
RESERVES DEPOSITED WITH LENDER: A
$ $ $ $ $ $ $
Aggregate Analysis Adjustment
1100 1101 1105 1106 1107 1108 1111 1112
Hazard Insurance Impounds Mortgage Insurance Impounds Property Tax Impounds Flood Insurance Impounds
TITLE CHARGES: A
A
Settlement or Closing Fee Document Preparation Fee Notary Fee Attorney Fee Title Insurance Premium Endorsement Fee
$ $ $ $ $ $ $
1200
GOVERNMENT RECORDER AND TRANSFER CHARGES:
1201 1201 1202 1204
Recording Fee City/County Tax / Stamps State Tax / Stamps
ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE
1300
ADDITIONAL SETTLEMENT CHARGES:
Prepaid Interest days @ $ Mortgage Insurance Premium Hazard Insurance Premium Flood Insurance Premium
$ $ $ $
1301 1302 1303 1304 1305 1306 1307 1308
Survey Termite Inspection Property Inspection Photo Fee
$ $ $ $ $ $ $ $
Total Purchase Price / Existing Payoff Estimated Closing Costs Estimated Prepaid Items / Reserves -Total Paid Items & Subordinate Financing -Seller Paid Closing Costs FHA UFMIP/VA Funding Fee -Base Loan Amount TOTAL ESTIMATED FUNDS NEEDED TO CLOSE
TOTAL ESTIMATED MONTHLY PAYMENT: Principal and Interest Real Estate Taxes Hazard Insurance Mortgage Insurance Homeowners Association Dues Second Principal and Interest Other TOTAL MONTHLY PAYMENT
$ $ $ $
$ $ $ $ $ $ $ $
TOTAL ESTIMATED FUNDS NEEDED TO CLOSE: $ $ $ $ $ $ $ $
These estimates are provided pursuant to the Real Estate Settlement Procedures Act of 1974, as amended (RESPA). Additional information can be found in the HUD Special Information Booklet, which is to be provided to you by your Mortgage Broker or lender if your application is to purchase real property and the lender will take a first lien on the property. The undersigned acknowledges receipt of a copy of the Special Information Booklet ‘‘Settlement Costs.’’
Applicant
Date
Applicant
Date
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A Survival Guide for Buying a Home
As you probably already suspect, RESPA does not regulate those costs. Lenders can charge whatever they think the market will bear. The important thing to remember is that lenders are required by law to disclose their fees in the Good Faith Estimate, along with the APR. Doing your homework comparing lenders and shopping for the best deal is up to you as an informed consumer.
Typical Closing Costs Closing costs vary slightly from state to state. Some areas require an attorney to handle the closing, while other areas require a formal escrow. Otherwise, the following closing costs are pretty much the same throughout the country. Just remember that nothing is sacred and everything is negotiable, especially in a lender-hungry market. Appraisal fees can vary depending on sales price and area, typically $400–$900 for homes less than $250,000. You’ll still want to compare line 803 on the Good Faith Estimate. If lenders are hungry . . . well, you know what to do. On line 804 you’ll find the credit report fee, usually $40–$80. This fee is not transferable, and if you go to another lender, you’ll pay this fee again. On the bright side, sometimes you can get a hungry lender to waive this fee Discount points, as you recall from Chapter 2, are prepaid interest a lender charges to buy down the interest rate. Each discount point is equal to 1 percent of the loan amount. On a $150,000 loan, that would be $1,500. Normally, each point will buy down the interest rate about one-eight of a percent for the life of the loan. Points are a favorite tactic money people and builders use so that they can quote a lower than market interest rate. They make the low quote by charging points as part of the closing costs. Line 802 on the Good Faith Estimate details the point costs you and your lender should hopefully have agreed on. Document Preparation and Processing fees are undoubtedly the most abused garbage fees on the statement. You’ll often find them in three different places, in the 800s column, on line 1105, and in the 1300 column. It appears that everyone involved in the transaction wants a document or processing fee. Just remember, the 800 column on the Good Faith Estimate is where most of the soft fees are. That’s where you can do the most haggling. The lender will require you to furnish a Homeowner’s insurance
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FIGURE 3-3 Typical closing costs. Item
Typical cost
Loan origination fee (what the lender charges to get you the loan)
Usually 1 percent of the loan amount
Loan discount points or buy-down costs
This cost is usually negotiated with the lender and/or seller before closing.
Appraisal fee
Typically $300–$500
Credit report
$40–$80
Flood certification fee (federally related loans require you to determine if you’re in a flood zone)
$10–$20
Flood insurance
If you’re buying in a flood zone, you’ll need this coverage. Your regular insurance company can give you a quote.
Tax service fee
This is paid to a private company to make sure property taxes are paid each year. Usually $60–$70 and is a one-time fee.
Settlement or escrow fees
The closing entity will charge you for doing the paperwork and closing the loan. Normally $150–$300.
Notary fee
Depending on the state, you may have to pay up to $75.
Title insurance
You’ll have to buy a policy protecting the lender. Cost depends on the sales price.
Document preparation fees
Someone has to prepare the documents, and fees less than $125 are reasonable.
policy. Often the company that insures your car will give you a discount if it does your homeowner’s policy. Still, shop around and get at least three bids. The insurance company will send the bill to the lender, and it will appear on line 903 of the HUDs as part of the closing costs.
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FIGURE 3-4 Possible garbage fees to watch out for. Item
Explanation
Loan origination fee
Typically 1 percent of the loan amount. Question the fee if it’s over this.
Lender’s inspection fee
Possible padding. The appraiser can handle this.
Mortgage insurance application fee
Question this fee. You shouldn’t have to pay an application fee.
Warehouse fee
Question this fee.
Commitment fee
Question this fee.
Processing fees
A great place to tack on a garbage fee. Question all processing fees. Sometimes real estate companies try to tack on a processing fee.
Document or doc preparation fees
A great place to tack on a garbage fee. Make sure no one involved in the transaction pads this one.
Courier fees
Less than $100 total.
If your loan is more than 80 percent, the mortgage company will probably set up an escrow and collect extra each month to pay property tax and homeowner’s insurance when it is due. To get this escrow started, the lender will charge you three or more months at closing to make sure there are enough funds in the account. These charges appear in the 1000 column. On line 901, the lender will charge you interest from the day of closing to the end of the month. Your first payment will then be due the following month, on the first. For example, if your loan is $175,000 at 6 percent interest, the first month’s interest will be $875. Divide this by 30 days, and the daily interest cost is $29.17. Suppose your closing is on the 16th; that gives you 14 days to the first of the next month. (Lenders usually go by 30day months) Multiplying 14 days times $29.17 per day interest equals $408.38, which goes on line 901 of the HUDs. In the case of the Good Faith Estimate, the lender doesn’t know what day you’ll close on, so line 901 is a guess.
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Lender’s title insurance is required by the lender to protect its interest in the property. It’s on line 1108 and is one of those fees you’ll have to pay to get the loan. Mortgage insurance or MIP is an insurance policy that protects the lender from default on loans with less than 20 percent down. Typical costs are .65 to .75 percent of the loan amount, depending on credit and down payment. This fee is included in the monthly escrow, along with taxes and homeowner’s insurance. For example, a $165,000 loan with 10 percent down and .65 percent PMI would have a yearly fee of $1,072.50. ($165,000 .0065). Dividing this by 12 months equals $89.38, which would go on line 902 for the first month’s premium. The origination fee on line 801 is what your lender charges to put the loan together and find an investor to buy it. Usually this fee is 1 percent of the loan amount. Is the loan origination fee negotiable? Sometimes. Remember the rule—nothing in the 800 column is sacred. If your brother-in-law is doing the loan, this is a fee to haggle over. If the lender hasn’t padded any of the other fees, they are probably worth their 1 percent or whatever you can get them down to.
Negotiating Lender Fees You don’t want to be fooled by lenders who create a package with low teaser rates and then make up for it with additional fees. And the only way you can determine how good a deal you’re getting is to compare Good Faith Estimates side by side. If the lender you’re hoping to go with has higher fees on an item, question it. Once your loan officer knows you’ve done your homework, you’ll be able to minimize the garbage fees. In fact, your lender will probably develop a grudging respect for your attention to detail. Because few buyers take the time to understand these fees and are intimidated by the whole process, mortgage companies sometimes pile them on. Few buyers question them or seem to care, so ‘‘why not’’ is a common attitude with many bankers. Question and negotiate fees as soon as possible after you get your Good Faith Estimates. It’s best to have everything settled before closing day and not have a pressure situation that could delay your closing. Whenever you and the lender have agreed to any changes, get them in writing with a revised Good Faith Estimate.
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The last step before closing is to have the title company or whoever closes the loan fax you a copy of the HUDs a few hours before you go in. But that usually happens only when you live in a near-perfect world. In real life, however, the closing agency may not get the loan package until just before you come in to close. If that’s the case, take a few minutes to sit down and go over the HUD statements alone before closing. Take notes, and if you have questions, bring them up when you and the closer go over the statements. This is important because if there are fees or other costs that are different from your Good Faith Estimate, you want to take care of them before you get to the closing table if possible. If you can’t, then don’t worry about it. Statements can be changed and reprinted until they’re satisfactory. Don’t let a closer tell you the statements can’t be changed. They may have to get on the phone to the lender or have them fax something over. But that’s fine; you’re the consumer, and you want it done right. Blair and Letia went through this when they bought their second home. The first time around, they didn’t know what was going on. This time, however, they were determined to be informed and know what they were paying for. They still wanted to go with their previous lender but decided to get Good Faith Estimates from three others before committing. Comparing the estimates line by line, Blair and Letia found that their previous lender was charging them a $300 processing fee in the 800 section and a 1.25 percent loan origination fee on line 801. The other lenders were charging only 1 percent origination, two had no processing fees, and one had a $125 fee. Totaling up the costs revealed that Blair and Letia’s previous lender was the most expensive on the list by $862.50. But he was charging 5.90 percent interest, and the other lenders were quoting 6.0 percent. Doing a little math, Letia calculated that the difference in monthly payments between 5.9 percent and 6.0 percent was $14.43 or $173.16 a year. Dividing the $14.43 payment difference into $862.50 higher fees yielded almost 60 months. That meant that if they didn’t sell or refinance their home for five years, they would break even. Not wishing to waste time haggling with their first choice lender, Blair and Letia simply decided to go with another lender whose bid they felt was more straightforward. Unfortunately, it didn’t stay so simple. When the title company faxed the closing documents to Blair at his office, he was out and didn’t get them until an hour before closing.
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Doing a quick comparison between the closing statement and the Good Faith Estimate, Blair noticed a $135 document preparation fee had been added in the 800 section. Not quite sure whom to talk to, Blair called the title company and was referred to the mortgage lender. Finally getting through to the loan processor, he had to do a little verbal arm twisting before the processor agreed that the fee was an error and the paperwork would be corrected in time for the closing. The bottom line is if Blair and Letia hadn’t tracked their loan paperwork and stayed on top of it, it could have cost them almost $1,000 more for their mortgage.
Working with a Lender on the Internet Surfing the Web is a great way to get a feel for loan options and rates, and you can even get a good loan over the Internet. However, the biggest caveat to watch out for is teaser rates. As mentioned before, a teaser rate is lower than the current market rate. The lender will try to make up the loss with padded fees or not be able to deliver Some good Web lender when it’s time to lock in the advertised sites to check out are: interest rate. www.countrywide.com For instance, if the financial markets are quoting mortgage rates at 6.0 percent www.e-loan.com that day and a Web lender hits you with www.getsmart.com 5.90 percent to get you to respond to its www.loanweb.com ad, you’ve encountered a teaser rate. You www.quickenloans can be sure the mortgage company isn’t going to lose money, so it will make this .quicken.com up in the closing costs or discount points. www.wellsfargo.com If in your surfing, you find a Web lender that’s a national bank or mortgage company, it may refer you to a loan officer at one of its branch offices closest to you. Other lenders may handle everything by mail, phone, and e-mail, with the closing handled by a local title company. Either way can work out.
How to Compare Loans on the Web Most mortgage Web sites have prequalifying worksheets on which you can fill in your debts, income, and maximum house price and get instant ratios and other loan data.
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If you want to go further, the next step is preapproval. You fill out a more detailed questionnaire along with a credit card number for a credit report and hit ‘‘submit.’’ Within a few hours, you’ll be contacted by phone or e-mail. The first step in E-Loan’s site, for example is a prequalification questionnaire. You enter data about your income, debts, and down payment. The site calculates your ratios and tells you if your numbers look good. To continue, you can click on ‘‘apply’’ and fill out more detailed data, along with your Social Security number. Most sites have loan comparison charts that let you look at the numbers side by side. On www.e-loan, one interesting column lists various interest rates you can get by paying up to 3 points. Each point, as we previously explained, equals 1 percent of the loan amount. If you happen to see a loan option you like, click on ‘‘apply’’ to go to the prequalification site, and the site guides you through the process.
Can You Get a Loan Cheaper on the Web? Troy and Deborah went this route when they bought their home through an Internet lender. Since both worked for a Web design company, they felt that getting a mortgage through the Internet would be a convenient way to go. They both liked the simplicity of e-loan’s site and decided to give it a try. After talking to four lenders who e-mailed them Good Faith Estimates, the one Troy and Deborah chose assigned them a personal loan representative who would handle their loan and answer any questions. The loan rep mailed the paperwork that needed to be filled out and returned along with W-2s, bank statement copies, and other verifications. The credit and appraisal fees Deborah paid by credit card and faxed a few additional verifications the lender needed. The process went smoothly, and it took about three weeks for the lender to complete and send the loan package to a local title company for closing. Interestingly, e-loan and similar Web lenders advertise that they can save you about $1,500 in lender fees. In Troy and Deborah’s case they had excellent credit, 10 percent down, and good ratios . . . a ‘‘slam dunk’’ for any lender. And when they closed, they did save about $1,370. However, if Troy and Deborah had had less than good credit and ratios, e-loan and other similar Web lenders would have probably re-
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ferred them to affiliate companies that would have tacked on lender fees that would have eliminated the savings. The bottom line is that yes, you can save money with a Web lender if you have good credit and ratios. These lenders are able to give you a good deal by streamlining the process and eliminating overhead. Passing these savings on to you eliminates many loan (line 800 garbage fees) fees. On the flip side, if you want to go FHA/VA, have credit problems, or need an off-the-beaten-path loan, the savings tend to disappear. You may be better off with an experienced local lender with the contacts and know-how to stretch the envelope and get you approved. A good example of this is Ryan and Wendy, who had good credit and a sizable down payment. They had found their dream home and wanted to make an offer, but the Web sites prequalified them for about $33,000 less than they needed. A local mortgage broker Ryan and Wendy contacted suggested they pay off some credit card and student loan debt to bring their ratios in line and go with a lower down payment. By getting their ratios out of the red zone and with a good credit score, they were able to qualify easily for a larger loan. The bottom line is that if you want to get the best deal, you’ll need to compare lenders’ Good Faith Estimates. With this approach, it won’t take long before you are able to shop confidently and quickly line up the best mortgage for yourself. The next step, in Chapter 4, gives you the tools to shop for your dream home and get the best deal.
Consider credit simulators for tight qualifying. You can also go to www.my fico.com and click on Products. For a fee, you get three major credit reports plus the use of their simulator. This allows you to see how paying off a loan or lowering a certain credit card balance could affect your credit score and in turn the amount of loan you can get. The table below illustrates how your credit score can change your interest rate and your monthly payment on a 30-year, $100,000 loan. As you can see, trashing your credit could cost you an extra $270 a month (the difference between highest and lowest FICO score).
FICO Score 720–850 700–719 675–699 620–674 560–619 500–559
Interest Rate 5.300% 5.425% 5.963% 7.113% 8.531% 9.289%
Monthly principal/ interest pmt. $555.30 $563.09 $597.17 $672.91 $771.11 $825.50
For other credit simulators check out www.credit xpert.com and click on the consumer page. You can’t buy direct from CreditXpert, but it has a list of venders on its site such as www .identityguard.com that you can order from.
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C H A P T E R
4
Once You’re Prequalified, It’s Shopping Time When you’ve decided on a lender, gone through the preapproval routine, and gotten a letter similar to the one in Figure 4-1, you’re good to go. The planning and fun begin. Interestingly, according to the National Association of Realtors’ 2002 Profile of Home Buyers and Sellers, homebuyers look at an average of 10 homes before making an offer. That’s a lot of data and floor plans to keep track of, and this chapter gives you the tools and knowhow to develop an effective shopping plan. Whether you work with an agent or want to shop on your own searching for your dream home, we show you how. Chapter 5 covers some advanced shopping techniques and how to negotiate with the seller to get your offer accepted for the best price.
Buy Conservative or Go for the Max Most lenders will qualify a buyer for the maximum loan possible. Since ratios are becoming more credit-score driven, you may be able to get a loan with total debt more than 50 percent of income. Some homeowners can handle these high ratios and do well, while others go bankrupt. Everyone is different in the way they handle their cash flow, and only you can decide on your priorities. From the lenders’ point of view, if you have a high credit score you’re more responsible. You should be able handle debt, so they’ll be a little more generous with a higher income to debt ratio.
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FIGURE 4-1 Prequalification letter.
ARBOR CAPITAL MORTGAGE, INC. September 30th, 2003 RE: John and Jill Doe Prequalification letter John and Jill Doe have applied for a mortgage loan with Arbor Capital Mortgage, Inc. We have evaluated their credit reports, verified their incomes, employment history, sources of down payment, and closing costs. The Doe loan application has been reviewed by an underwriter, and they have been preapproved for a $185,000 mortgage, subject to the following conditions: 1. 2. 3. 4. 5. 6.
Maximum purchase price of $185,000. Home to appraise for at least the purchase price. Interest rate at time of lock-in not to exceed 6.0 percent. A clean title report on property by an accredited title company. No significant change in assets or employment. Final underwriting and quality control approval.
Blaine Rickford President Arbor Capital Mortgage, Inc.
921 E. Executive Park Drive, Suite A. Salt Lake City, UT 84117. • 801-685-2505 • Fax 801-685-2509
Why You Should Go for the Max One school of thought is to buy the most expensive home you can. Because most homebuyers invest less than 20 percent down, you’re using the lender’s money to control a much larger amount than you’ve invested. The money guys call this leveraging your investment. As the home increases in value, the return on investment is a percentage of the home’s value, not a percentage of your low down payment. Also,
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with a 30-year mortgage, your monthly payment remains the same. But, as your income goes up, the mortgage payment takes smaller bites out of your paycheck. Homebuyers who purchased their homes in the 1970s and 1980s saw the value soar and their incomes go up, but their monthly payments stayed the same. Those who stretched and bought bigger homes in the best areas benefited more because their homes appreciated the most. With the current federal tax rules, a husband and wife can sell their home and walk away with the first $500,000 tax free. Wynn and Barbara took advantage of this when they sold the home they bought in the mid-1970s for about $38,000. They chose a good area and kept the home updated. When they both retired, they sold their home for $249,000 and bought their dream motor home for half and banked the rest. It was all tax free, a gift from Uncle Sam for buying a home. Proponents of this house buying approach also point out that by buying to the max now, you’ll save a future move. Since moving is disruptive, time consuming, and costly, you’ll save about $30,000 in selling, loan, and moving costs if you stay put longer.
The Conservative Side On the flip side, the conservative argument is, don’t become a slave to your mortgage payment. Keep your payment as low as possible and pay off the mortgage early. This approach certainly has merit if your goal is to be debt free as quickly as possible. In the end, you must decide how big a monthly payment you can comfortably handle and not let an agent or lender talk you into going for more than you want to go. But, it’s important to remember that a home is more than just roof and hearth—it’s also one of your most important investments. You want it to grow through appreciation as well as paying down the mortgage.
Importance of Location You’ve probably heard that location is everything in real estate. That if you buy well you’ll sell well. These truisms are the cornerstones of real estate strategy, and here’s why.
The Cheaper Deals Are Not Always Cheaper In less desirable locations, homes are cheaper, and so-called good deals are easier to find. These are often in areas of older and smaller homes,
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and buying one will cost you higher upkeep costs with lower appreciation. In other words, the years of mortgage payments and upkeep costs will yield less return on your investment when you sell. Many first-time homebuyers have a dream that if they can find a home that needs minor fixing up, they can buy on the cheap and sell for a profit. Fixing up a home for profit can work if you do your homework and handle it wisely. Unfortunately, many people fall into the trap of adding on or remodeling a small home and overimproving for the neighborhood. When asked why they added on, they usually say they planned on staying there forever. They didn’t stop to think that their employment might not last forever. In the end, they have created a white elephant, which takes a long time and/or a big loss to sell.
You Overimprove, You Lose Greg and Sherry made the mistake of overimproving their two-bedroom home when their second child came along and it got too crowded. They loved the neighborhood, had lived there several years, and didn’t want to move. They reasoned, why not build an addition to the home for the room they needed. Interest rates were down, so they decided to refinance and do the add-on. A friendly mortgage lender agreed to refinance with enough extra to cover the $40,000 construction bid. The remodel almost doubled the size of the home and created enough room so that Greg and Sherry wouldn’t have to worry about moving anytime soon. It seemed to be a perfect solution. However, two years later Greg got a job offer in another city that was too good to ignore. They would have to sell their home, but when they talked to several realtors, they were shocked at the suggested sales prices. One agent, more forthright and with a little more patience, explained why her pricing was so low. First, all the other homes on the street were two-bedroom cottages. There was nothing in the area as big as Greg and Sherry’s house. So the $35,000 remodel increased the price by about $12,000. Second, the lender had refinanced the home for about 120 percent of appraisal. On second mortgages and equity loans, the owner’s credit can weight as much as the appraisal. Third, the homeowners didn’t take into consideration what the neighborhood values were. In fact, they pretty much ignored them and ended up with a house that had a mortgage $20,000 more than what it would sell for.
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FIGURE 4-2 Dos and don’ts when shopping for a good area. What to look for 1. First, check out areas close to colleges, upscale shopping, cultural, and sporting events. You’ll notice that people are spending serious bucks remodeling older homes. 2. Find out what areas have the best schools and check out homes within their boundaries. 3. Look for areas that are close to where young professionals work and are moving into. When it’s time for you to sell and move up, these are the buyers you want to attract. 4. If prices in your interest area have steadily increased over the past few years, that’s a good sign. Reasonably priced starter homes may be hard to find. 5. New areas and subdivisions can be a good way to go. Values will tend to go up in the long term.
What to avoid 1. Avoid buying on busy streets and in high traffic areas. 2. If the schools don’t have a good reputation, this may be an indication the area is going downhill. If so, home values will follow. 3. Before you buy, check out what type of people live in the area. If there are low wage earners, you may have a problem selling for top dollar a few years down the road. 4. If there are a lot of good deals and concessions, there’s a reason. It’s usually not too hard to find out why, if you look around and talk to people in the area. 5. If it’s a new subdivision of starter homes and you plan on moving in about five years, others who bought at the same time may also want to move. This may put more homes up for sale than the market can handle, and prices will decline in the short term.
Fourth, they assumed they would live there forever and didn’t consider that employment and life changes can make the best plans go awry, especially in the technology job market. Fifth, a home mortgaged for 20 percent over market value will take about 12 years to pay down to breakeven. Of course, the market can and will change several times in the next 12 years. But, you can’t count on the market heating up like in San Francisco or other high profile areas and bailing you out in months. In the end, Greg and Sherry ended up renting the house and subsi-
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dizing it for about $150 a month. Hopefully, the rental market will improve in the near future so they can at least break even or sell.
What to Look for in Location The two important keys to remember are, the better the location, the more you can improve both the house and its value. If the overall real estate market heats up, better areas appreciate more. In less desirable areas, you won’t be able to get back your investment on anything other than basic improvements, unless you buy real cheap. For example, there are older neighborhoods in nearly every city with small 900-square-foot homes built in the 1940s and 1950s. If they’re near a university, downtown, or other desirable location, their value has probably soared. Yet, these same types of homes built near an airport or business park will go for many thousands of dollars less and be hard to sell. In one instance, Andy and Rebecca found a 1950s two-bedroom, brick cottage near a private college and close to an upscale shopping area. The house was an estate sale and hadn’t been upgraded, but they got a good deal on it and were excited at the potential. Looking at other homes in the neighborhood, Andy and Rebecca noticed that most had been remodeled or upgraded. Actually, their home was the ‘‘ugly duckling’’ of the street. It was an opportunity, and they took advantage of it by painting, restoring the woodwork, and upgrading the kitchen, furnace, and wiring. A few years later, when Andy and Rebecca outgrew their home, they had accumulated enough equity to put a sizable down payment on their next home. So what did they do right? First, they focused on the area. They looked for a neighborhood that would go up in value and was near a college, university, or popular shopping area, an area that would appeal to young professionals who didn’t like a long commute, where homes had charm, and where similar minded homebuyers were moving in and renovating. Second, Andy and Rebecca were careful about the money they put into the home. A big part of their upgrading required elbow grease and paint. The money they did spend went where it would give them the best return, a new furnace, roof, and kitchen. Third, they realized that eventually the house would be too small and they would have to sell and move to a bigger home. Their plan was to accumulate as much equity as possible, and they kept their eye on what homes were selling for in the area.
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Don’t Forget the Schools One of the big contributors to how desirable an area is are the schools. An area that has a reputation for good schools will have homebuyers actively seeking homes there. Realtors will advertise that their listings fall within certain school boundaries, knowing that will attract serious homebuyers. When you can find a good area with desirable schools, you’ve got a powerful Area is most important. You combination for rapid home appreciation. can improve a small home In a seller’s market, these homes will apin a good area and make preciate faster and for more money and money. In a not-so-good hold their value better in a down market. You can go to www.schoolmatch.com area you’ll make less or lose and key in data for the schools in your money. area of interest to find out how they are rated. However, this is only one tool. You’ll also need to talk to parents in the neighborhood to get a realistic picture. The bottom line is to go for the best location you can afford. A bigger house in a less desirable area is not as good a deal as a smaller home in a better area. In addition, always factor in the school system; it influences an area’s desirability and value. Even if the dog and/or cat are all the family you’ll ever have, it’s still wise to buy in a good school district. Resale is easier and more profitable if the area has a reputation for good schools.
How to Find and Work with an Agent Realtors are professionals you hire to help you handle important events in your life, namely, buying and selling a home. And like mortgage lenders, home inspectors, and brain surgeons, you want the best. Someone who can be objective, whose expertise you can tap into, who has the experience to get you out of the problems that are bound to come up without costing you a fortune.
Go with a Professional, Not a Friend or Relative Too many homeowners go with Aunt Susan, Uncle Harry, Cousin Joe, or a neighbor who just got his real estate license. The last thing you want to do is entrust one of the most important things in your life to an amateur. You’re talking about hundreds of thousands of dollars,
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your family’s happiness, and future well-being. If you don’t get a good professional, then you’ll feel the pain most when they make a mess of things and you have to pay the big bucks. A typical example is when Aaron and Randi decided to buy their first home; they called Randi’s Aunt Wendy, who had just gotten her real estate license, to find them a home. The first thing they did was pile in Wendy’s car and start looking at homes. They looked at $90,000 to $250,000 homes from one end of the county to the other. At first it was fun, but then it got frustrating. They were making zero progress toward finding a home. Wendy was clueless. She thought that if she showed enough homes, they might get lucky and find one that worked. Finally, out of desperation, Wendy asked her new broker to assign an experienced agent to help out. With professional help, things improved quickly. Aaron and Randi met with a lender and got a prequalified letter and were able to zero in on homes they could afford. Within a few days, they made an offer on a cute three-year-old ranch with a big yard. Fortunately, this situation worked out and the damage was limited to a couple of weeks of spinning wheels and a little frustration. In the end, the buyers found a home and Wendy learned a few hard lessons about working with clients.
Narrowing Down Your List Finding a good realtor is like finding a good lender. You talk to at least three agents before you commit. If you know someone who has bought a home recently and was happy with the agent, then add that agent to the list. Other excellent sources are mortgage lenders and title people. They know who the good agents are because they work with them on a daily basis and are aware of how good a job they’re doing for their clients. After you’ve put together a short list of three or four agents, give them a call, and chat about their expertise in the area you’re interested in. Set up an appointment with those you feel most comfortable with. If you eliminate one or two with your phone call, that’s fine. You’ve saved some time. Don’t automatically assume that the area superstar agent will be your best choice. She may be so busy that you end up working with an assistant most of the time. A newer agent who knows the area well, doesn’t have a lot of clients, and is willing to work with you can be a
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good choice. Make sure the agent has a computer and is multiplelisting fluent. Another important attribute you’re looking for is an agent who will listen to what you want, who takes the time up front to understand your needs and not try to sell what she wants you to buy. If an agent shows you homes out of your price range and area or pressures you to buy a home you don’t feel comfortable with, get another agent fast. This one doesn’t have your best interests at heart. Finally, make sure the agent you choose has a cell phone and is easy to contact. Fast communication is important. With current technology there’s no excuse for an agent not getting back to you within an hour or two of when you leave a message. If you get voice mail every time you call and she is slow to get back to you, seriously consider getting another agent.
All About Buyer’s Agency The first thing an agent will likely talk to you about is buyer agency and ask you to sign a buyer’s agency agreement. This can be either an exclusive or nonexclusive agreement. Exclusive agency means you agree to work with that agent only for an agreed on period of time. For example, if you happen to drop in on an open house and fall in love with it, you’re bound by the contract to get back to your agent to write up an offer. The advantage of an exclusive agreement is the agent will be motivated to work harder for you, knowing his efforts won’t be wasted. Still, it’s a good idea to have in writing that you can cancel the agreement any time by giving written notice. You’ll still be bound to that agent for any properties he has previously shown you. But, you won’t be locked in to an agent who’s not doing a good job. Before you sign an agency agreement, make sure the time frame for the agent getting a commission if you buy a home he shows you is not more than 60 days. Some agents like to write in six months, but that’s excessive. If an agent is doing a good job for you, then this paragraph won’t be a problem. Checking the nonexclusive option means you are not bound to that agent, but you must use him on any properties he has shown you. You can sign a nonexclusive agreement with as many agents as you want. But that can be counterproductive, because none will take you seriously. It’s best to go exclusively with one agent you like who can do a good job for you. Remember, loyalty is a two-way street.
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Buyer agency forms vary from state to state, but the basics are similar and cover the following: Any agent representing a homebuyer must have a written agency agreement defining the scope of the agency. Buyer’s agents act solely on behalf of the buyer and owe the buyer their loyalty. All information between agent and buyer that would weaken the buyer’s bargaining position is to be kept confidential. The buyer’s agency accounts for all earnest money deposits in the trust account. An obligation exists to disclose to the seller and other agents on initial contact that a buyer’s agency exists. Of course, this agency agreement does not permit the agent to misrepresent the buyer’s financial condition or ability to perform when presenting an offer. In those cases when an agent represents both buyer and seller it’s called dual or limited agency. There is some controversy with dual agency, and in some areas brokers feel the potential liability is great enough to avoid it. But, the majority of brokers will work with you, and usually both sides are happy with the results. Most problems associated with dual agency have been the agent’s failure to properly disclose that he was working for both parties. State real estate regulators consider failure to disclose one of the cardinal sins. As with other agency agreements, dual or limited agency paperwork will vary from state to state, but the common framework is: (1) an agent who represents both buyer and seller must have a written agreement with both parties consenting to and defining the scope of the limited agency, and (2) because an agent who acts for both buyer and seller is in a contradictory position, the agent must be neutral and cannot disclose any information that will harm either side’s bargaining position. An emerging concept called transaction brokerage is gaining momentum across the country. A transaction broker works with the consumer without establishing an agency relationship. The agent in effect becomes a facilitator working with a buyer or seller to put the deal together. It is hoped that the facilitator option will limit liability for the agent and the seller as well as give consumers a choice of how they want to be represented.
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From the consumer’s point of view, putting the agents under the spotlight to disclose whom they represent is a plus. It discourages misrepresentation and allows a homebuyer to legally tap into the expertise of the agent.
Develop Your Dream House Shopping List Before you hit the road looking at homes, you must take the next step—a crucial one—and work up a checklist of what’s important to you in a home. It’s helpful to divide your list into ‘‘must have’’ and ‘‘like to have’’ amenities. This won’t be easy and may take some soul searching, but the more time you spend crystallizing your thinking, the easier and shorter the search. For instance, Randy and Jennifer looked at dozens of houses and spent a big chunk of their Saturdays driving by open houses. Whenever they walked through a home she liked, he didn’t. What got Randy excited, Jennifer balked on. It had the trappings of a power play—if she couldn’t get her kitchen island and crafts room he wasn’t going to get his garage. The real problem was that Randy and Jennifer had never sat down and worked out their priorities—the important things they both wanted in a home in the order of their importance. They just started looking at homes, assuming that everything would fall into place, that their tastes and dreams would mesh into a cute cottage with a white picket fence. Reality, unfortunately, is usually much different. However, once Randy and Jennifer—with a little prodding—met with an experienced agent who was able to get them talking about their ideas together, it started coming together. They were able to work out compromises and establish a workable plan. They did this with a wants and needs list.
Working Up a Wants and Needs List You start by asking yourself the following questions: 1. How far are you willing to drive or spend time commuting?
That will determine the radius of your search area. 2. How far away are the schools, and is busing required? If you’re
interested in a certain school, verify the boundaries with the school district, because they can change yearly.
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FIGURE 4-3 Home Shopping Checklist To help you fill out the following, get everyone together who will live in the new house and make a list of six or more things you love about your present home and location and six or more things you don’t like. This will help you decide what features you’ll need to create the lifestyle you want. If you’re a first-time homebuyer, look at what you like about your family home, what you like about friends’ homes, and what you don’t like. What You Don’t Like 1. 2. 3. 4. 5. 6.
What You Do Like 1. 2. 3. 4. 5. 6.
Once you’ve listed what you like and don’t like in homes and areas, the next step is listing needs and wants. Must Have 1. 2. 3. 4. 5. 6.
Wants 1. 2. 3. 4. 5. 6.
It’s also important to ask yourself what kind of house will make a home. For example, if you have children, a family room next to the kitchen or a more open floor plan may be better than the formal floor plan found in many colonials. Crystallizing your thinking and making lists before you look will save a lot of time and frustration.
3. What style of home are you interested in and why? 4. What type of floor plan will be the most compatible with your
lifestyle? 5. How close do you need to be to shopping, houses of worship,
and recreational facilities?
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Narrowing Down Your Choices Go over the list you’ve worked up carefully with your agent so she can enter your preferences in the multiple-listing computer. Matching your criteria against the thousands of homes on the market will take only a few minutes. The resulting printout should contain only those homes in your price range, areas of interest, and with the amenities you selected. How many homes do you need to look at? On the average, most buyers narrow the list down to between five and twelve homes if they know what they want. Still, it’s possible that the first, second, or third home you see could be love at first sight. In that case, it’s a good idea to accelerate the search and eliminate the rest of the homes on your list. Also have your agent update the list for any similar homes to the one you like that may have just come on the market. If the computer comes up with no comparable homes, then you’ll probably want to write an offer ASAP! Suppose you find the perfect area but no homes are for sale? This can be due to a strong seller’s market or your timing is just off. When this happens, here are two strategies that have proven successful. 1. Have your realtor enter your preferences in the MLS (multiple
listing service) computer’s prospect function. Your home specifications will be matched automatically by the computer to new listings as they come on the market each day. 2. If you’ve wondered what it’s like to be a politician, you can do
like they do and either phone or knock on doors in the area you’re interested in (weekends work the best). Put together a simple flyer and leave it with everyone you talk to. When homeowners find out there’s a qualified buyer looking in the area, decisions to sell can happen quickly. Ryan and Sue went this route when they wanted a home in a certain school district and neighborhood, but none were on the market. Being resourceful, they put together a flyer with a picture of their family and a short letter outlining why they wanted to live in the area and asking anyone who was thinking of selling to call them. A week later, after passing out about 75 flyers, Ryan and Sue got a call from a couple about to retire who had been thinking of downsizing and moving to a warmer state. The flyer prompted the couple to decide that opportunity was knocking and now was the time to move. On inspecting the home, Ryan and Sue found it was just what they had been looking for, and a deal was put together.
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Of course, not all projects like this work out as well. But, it’s amazing how often potential sellers are galvanized into action when they hear a qualified buyer is interested in the area.
Do a Reality Check When you feel you’ve found the home you want, apply the following reality checks to keep your choice from becoming a disappointment. If you drive, is your home east of where you work? Having the sun at your back to and from work is preferable to having it in your face. Drive by the home you’re interested in at night. Is the home a target for headlights at night? Do cars entering or exiting the street light up the bedroom or create an annoyance? Are there noises in the area at night that will disturb your sleep? Nearby business that you won’t notice during the day can be busy at night. Likewise, early morning noises can create a problem. Loading docks, shipyards, and train station noise can carry quite a distance in the early morning. Visit the home on a weekday. Commuters may use the street in front of the house for a shortcut to the freeway. Neighborhoods that are quiet on weekends may be noisy on weekdays. Is the neighborhood compatible with the lifestyle you want? Are you the type of family that likes neighbors with kids? Do you prefer a quiet street and the neighbor next door has a teenager who likes to rebuild motorcycles on weekends? The best way to find out about a neighborhood is to walk around and talk to several neighbors. If there are problems or negatives, you’ll hear about them fast. Finally, have your agent run a computer list of what similar homes have sold for in the neighborhood for the last 6 to 12 months. Note the days they were on the market before they were sold and the gap between list price and sales price. Has this gap widened or narrowed in the past few months? How many homes in the area are rentals, and are the numbers increasing? You want to make sure the area is on the upswing. If you’re like many Americans, you’ll move in the next six years, and trying to sell a
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home in a declining area will not be fun or profitable. Planning an exit strategy is as important as buying.
Pros and Cons of a Fixer-Upper Buying a run-down home and fixing it up as a way to get into a home on the cheap is a dream of many first-time homeowners. It can be done, but the waters are shark infested. The key to not losing money is having a step-by-step plan and following it. This section will help you find out if sawdust and paint is your thing.
Finding a Fixer-Upper It may by now be a cliche´ , but location is the key to finding a fixerupper. Homes in good locations increase in value more quickly and hold their value when the market is down. Most importantly, you’ll be able to build equity for a down payment when you move up. The best sources for finding good deals are the classified ads, word of mouth, the Multiple Listing Service (MLS), and foreclosure sales. And you must become an expert on home values in the areas you’re interested in, so that you can move quickly when a deal from one of these sources pops up. Networking in your area of choice, especially with knowledgeable and reputable realtors, is a great way to find out about estate sales or houses being unloaded by divorcing couples. Through their computerized MLS system, realtors can also keep you informed instantly of homes coming on the market. Ron and Ellen bought their first home this way. They had been looking in an area near a small college for several months when a realtor they had been working with called. He was putting a threebedroom bungalow on the market later on in the day that was part of an estate settlement. The heirs wanted a quick, as-is sale and were willing to deal. The home was in good condition but was dated. The wallpaper had to go, and the wood trim had several layers of paint. But it was exactly what Ron and Ellen were looking for. They made an offer for about $20,000 under market value with no contingencies and a quick closing. Their offer was accepted. The keys to success in this case were the homebuyers doing their homework on what areas to zero in on, getting their financial ducks in a row so that they could move quickly, and having a willingness to do some messy fix-up work.
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In this case, they steamed off the old wallpaper and painted the walls, removed layers of old paint, and restored the wood trim. Ron and Ellen also resanded and refinished the wood floors. It was hard work, but when they were through, the result was stunning. Their next project, when they save more money, is to update the kitchen and bathrooms. That should bring the home’s value up to the neighborhood average. With the area becoming more trendy, this home will appreciate and yield a nice profit in a few years, when Ron and Ellen are ready to move up.
Foreclosure Sales You can sometimes buy a home that a bank has foreclosed on and get a good deal, but it can also be tricky. Judy Morrell, a Salt Lake City rehabber for 20 years, has had a lot of success with foreclosed properties she buys and her husband and sons fix up for resale. ‘‘You don’t always have the option of inspecting the property beforehand,’’ Morrell says, ‘‘so it’s buyer beware . . . what you see is what you get.’’ She also cautions that if you’re not a pro, it’s easy to get caught up in the bidding and pay too much. You must know the area and the market value of the home you’re bidding on and walk away when others are willing to pay more. The best way to track foreclosure sales is get a list of homes that have had a Notice of Default recorded. This list is available from a title company or your county recorder’s office. Once a Notice of Default has been recorded, the clock starts ticking, and unless the payments and legal fees are made current, the house will go on the block in about four months.
Do’s and Don’ts of Buying a Fixer-Upper Get a list of recent home sales and statistics from a real estate broker on the area you’re interested in. Note if the values are going up or down and how long it’s taking homes to sell. With the help of a contractor, check out the property as much as possible and determine the fix-up costs. Get written bids on work you can’t do yourself. Here’s where the rubber meets the road. You have to be honest about whether you have the time and expertise for what needs to be done. Make a list of what you can do and what you’ll need to hire out. Get those bids in hand and add in the cost of the materials for what you plan to do yourself. Add that total to the
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cost of the home. How does the total cost compare to the projected market value when you’re finished? If possible, make any offers contingent on a professional home inspection. This will cost you about $300, but it’ll be worth it if it saves you from an expensive mistake. If the report comes back with surprises, you can use it to renegotiate the price to cover repair of the ‘‘surprises.’’
Buying New Construction Like buying a new car, there’s something about the smells, fresh paint, and newly installed carpet in a new house. Many homebuyers feel this is the way to go; they don’t want to redo someone else’s decorating and landscaping. If this is the route you want to take, then this section will show you how to find and buy a new home and get the best deal.
Shopping the Projects The first step after you’ve got that loan commitment in hand is to make a list of the new communities in the area you’re interested in. Before you waste a lot of time driving out to them, call and find out the median price of the homes. Don’t go by the starting price in the advertising. Projects rarely have homes or even sell them at the bottom of their price range. From the builder’s standpoint, the name of the game is to upgrade you to the maximum you can qualify for. Before that can happen, they have to get you out to the models. It’s similar to buying a car. You may be attracted to a dealer by the low advertised price, but when you get there, you find it’s a stripped down model. The salesperson then pressures you to upgrade. New homebuilders are masters of this. By the time you get through the options and upgrades, the real price range starts about halfway up the scale. If you plan on this from the beginning, you’ll save a lot of running around. This is not to say that builders are dishonest, just that new home marketing stretches the envelope a little to get people through their projects.
Ten Things You Should Know Before You Buy a New Home 1. Builders often try to pressure you to use their lender. They want to minimize deals falling through, and controlling the financing is one way to do this. They may offer you upgrades or buy-downs to go with
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their financing. Of course, the best way to find out if these incentives are really free is to get a Good Faith Estimate from the builder’s lender. Compare it with estimates from a couple of other lenders, and the best deal will become obvious. You’ll often find that the teaser interest rates advertised will cost you, and you can get just as good a deal, or a better one, with another lender. If you do find a better deal than the builder is offering, get a qualifying letter from your lender. This should satisfy most builders that you’re a genuine, qualified buyer. 2. Get copies of the CC&R (cove-
nants, conditions, and restrictions) and HOA (Homeowners Association rules). Read them over carefully, because these documents will tell you what you can and can’t do with your home. For example, you might be prohibited from parking RVs (recreational vehicles) next to your home, or there may be restrictions on how and what your landscaping will be. One homebuyer had a motor home that he wanted to keep on an extended driveway next to his home. Unfortunately, he didn’t read the CC&Rs before he bought. When he started to work on his driveway extension, he found out quickly that RVs were not allowed on the home sites. This ended up costing him $35 a month at an RV storage about a mile away. 3. Research the builder. Check with the Better Business Bureau and a state contractor’s board if you have one. Research not only the company but also the builder’s name. You want to know if there have been complaints filed, how many, and if the builder has gone bankrupt recently. If the company or builder has generated lots of complaints, seriously consider shopping elsewhere.
An indispensable tool for home hunting is a handheld sonic measurer. With a push of a button you can quickly measure a room to see if your furniture will fit. Inexpensive models are available through companies at these Web sites: www.calculated.com, www.newpronet.com and www.zircon.com.
Homebuilder Web sites: www.Homebuilder.com www.newhomesdirect.com www.newhomesale.com www.homegain.com
4. Walk around the community and talk to at least three new homeowners. Ask them how they like the builder and how fast problems, or complaints are handled. Especially important, find out how
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many items were on their punch list and how long it took the builder to take care of them. The punch list is a list of mistakes, problems, or anything the builder has to take care of that you find during final walkthrough. If the new owners all tell you the punch list is more than a dozen items and repair is slow, that’s a red flag. 5. Ask the salesperson or builder representative how close to the completion date homes are finished. If possible, get a copy of the construction schedule. If the builder is behind a month or two on projections, this may cause you problems if you have to be out of a home or rental on a certain date. This is another red flag to consider. 6. If you find a model you absolutely love and want to put a deal together, make sure you get everything you want in writing. An oftenused saying in real estate, painfully learned and relearned, is: ‘‘If it isn’t in writing it doesn’t exist.’’ Verbal promises are nothing more than hot air, because you can’t enforce anything not in writing. 7. Get a price list of the options and upgrades. Don’t ever sign any paperwork unless you know exactly what an item costs. ‘‘To be filled in later’’ is an absolute no-no. Also, never leave the sales office without copies of all the paperwork. Too many buyers run into problems later because they didn’t get copies of addendums covering upgrades and options. Nathan and Laure found this out the hard way when they bought a home in the first phase of a new community. The salesman told them that a fireplace (a $2,500 option) was included in the model they picked out, and they took his word on it. Several weeks later, when they did a framing walk-through, they noticed the concrete and framing for a fireplace was missing. As it turned out a fireplace for that model was not standard, and the salesperson who wrote up the sales contract no longer worked for the builder. You guessed it—there was nothing in the paperwork about a fireplace. Nathan and Laure had to write a check for half the option or $1,250 to get it added, with the balance due in 30 days. Obviously, they weren’t too happy about it, but there was nothing they could do without losing a sizable deposit if they backed out. 8. This can’t be stressed too strongly. Make sure you get copies of all documents and number the addendums 1/x, 2/x, etc. Missing addendums usually cause the most problems because that’s where changes and contract modifications are written. 9. Make sure you understand the paragraphs in the purchase con-
tract about when you close. Builders often pressure you to close before
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the house is finished or the punch items are completed. You don’t want to close before all items are done, so deal with this up front and get it in writing on an addendum if you have to. 10. Before you buy a new home, get the highly recommended
book The Ultimate New-Home Buying Guide by Jeff and Susan Treganowan (ISBN 0-9706737-0-1), available online through Amazon.com or bn.com.
How to Shop for a Home on Your Own After you’ve gotten a preapproval letter from your lender, you’re good to go. Working with an agent can make house hunting much easier, and the seller normally pays the buyer’s agent. But if you feel for some reason that you don’t want work with an agent, you’ll need to line up a real estate attorney to write up the deal. The next step is to check in the local Yellow Pages for a home inspector who is Useful Web sites for checka member of the American Society of ing out neighborhoods: Home Inspectors (ASHI). With these re- www.realtor.com sources lined up, you’re ready to check www.homeadvisor.com out classified ads and homes-for-sale pubHomeSeekers.com lications. Deciding what homes to look at from www.cyberhomes.com ads can be a frustrating experience. Own- www.iOwn.com ers as well as real estate agents often omit www.realestatebook.com the address or price, forcing you to call www.revillage.com them. The Internet is a little better, but in the end you’ll still need to call the owner www.Owners.com www.homesdatabase.com for an appointment. If you know the area and the neigh- www.Homeroute.com borhoods you want to live in, the battle is half won. The strategy then becomes driving through the neighborhoods looking for signs that pop up. When you find one, get the phone number and call the owner to see the house. If you are new to an area and don’t know the neighborhoods, you’ll need to do some homework. First, determine how far from work you want to commute. Second, from homes-for-sale publications, ads, and going to www.realtor.com, make a list of the neighborhoods in your price range and drive through them. This will take some time and a few tanks of gas to narrow down the list to neighborhoods you want
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to live in. Once you’ve done that, it then becomes a matter of scouring ads and looking for lawn signs.
Internet House Hunting Realtor.com is the premier Web site for finding a home. This is a realtor site that has all the homes listed in the United States. However, it doesn’t have homes for sale by owners. These you’ll have to find through classified ads and lawn signs. Many newspapers now have their classified ads on a Web site that allows you to narrow listings down by area. To access links to newspaper real estate sections in your area, go to www.newspaperlinks.com and click on your state and city. Should you find a home you want to see that is listed by a realtor, you’ll need to call the agent for an appointment. If the home turns out to be your dream home, you have two options. First, you can sign a dual agency agreement with the listing agent, by which he represents both you and the seller. In this agreement, the agent agrees to walk a fine line and not disclose anything to either party that would jeopardize their interests. If the agent is a reputable person, this can work out. You’ll have someone who can write up the paperwork and is motivated to follow the sale through to closing. Dan and Kim went the dual agent route (also known as limited agency) when they bought their home. They drove by a home that looked interesting, so they called the agent’s number on the sign to go through the house. When they saw the inside, the home wasn’t quite what they wanted, but the realtor had another home that had just come on the market that might fit what Dan and Kim were looking for. It was on a cul-de-sac, and the neighborhood had young families with school-age kids. Dan and Kim loved the house and decided to make an offer. Before the realtor wrote up the purchase agreement, he went over a Limited Agency Consent Agreement with them that both the buyers and sellers sign. In this agreement, the agent agrees in writing to represent both parties and not disclose anything that would hurt either party’s bargaining position. For example, if the buyers were prequalified for $175,000 but they wanted to offer $160,000 on a house, the agent wouldn’t disclose that to the sellers. Also, the agent wouldn’t disclose that the sellers would accept less than the listed price. His job is to write up the price the buyers want to offer and present to the sellers for acceptance or a counteroffer.
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In this case, Dan and Kim made an offer $2,500 less than asking price, and the sellers accepted. Both parties were happy with the result. In presenting the offer, had the agent known that the sellers would have gone for $5,000 less, he could not have disclosed this. Nor could he have disclosed that the buyers were qualified for more than they offered. Some consumer advocates object to dual agency as being a conflict of interest. True, it has that potential, but in reality, there are some pluses: One, the agent is motivated to do his best to put the sale together with the price and terms you offer. Two, it’s easier to deal with one agent, especially if the agent is a professional. The deal can go a lot smoother because the agent knows both parties in the transaction. Three, the seller is paying the realtor fees, so you get the agent’s help for free, which is not a bad deal. Of course, to protect you in the transaction, you’re still going to hire a home inspector to check out the house, and the offer you write up will be subject to the inspector’s report. The second option is to not sign a dual agency agreement, but you should get your own help writing up the offer. If you’re uncomfortable with dual agency or don’t like the listing agent, getting a buyer’s agent or an attorney to write up the deal may be the best way to go. Once an offer is in writing, it’s given to the listing agent to present to the sellers for acceptance or counteroffer.
Narrowing Down Your Choices It’s not uncommon to end up with two or three homes you like and be forced to make a difficult decision. An effective tool to help do that is a checklist such as the one in Figure 4-4. Copy the form or take it with you. As you go down the list, give each item a numerical score from 1 to 3. When you’ve completed the columns, total up the score for each choice. The one with the most points is the one you’ll most likely find is the best fit for you and your family. Once you’ve settled on the home you want to make an offer on, go to Chapter 5, which shows you how write up it up and get it accepted for the best deal. This part is for many homebuyers the most exciting aspect of the home-buying process, next to closing and getting the keys.
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FIGURE 4-4 Narrowing down your choices checklist. (Give each item a rating between 1 and 3 with 3 being the best, or highest.) Item
House 1
House 2
House 3
Location The results of a walk through the neighborhood Schools
Commuting distance Proximity to shopping and areas of interest Home style Exterior condition Curb appeal Roof Garage/carport Kitchen Family room Bedrooms Storage Basement Yard Work or updates needed Seller concessions Resale potential Other Total score
Elem. Jr. High High school
Elem. Jr. High High school
Elem. Jr. High High school
Y
C H A P T E R
5
Getting the Best Deal Once you’ve created a list that crystallizes your thinking on the type of home and amenities you want, the next step is narrowing down your choices by looking at condo projects and neighborhoods and going through homes and open houses. From this activity, certain neighborhoods, projects, and home styles start standing out, and your shopping becomes more focused. It won’t be long before you walk into a house or condo and know that this is it. It has the feeling of home, and an emotional attachment develops as you walk through. It can get both exciting and stressful when you stand in the entry and know this is the house you want. This is what you’ve been searching for. You want the home, but you also want the best deal you can get. So what do you offer? How low an offer can you make and not insult the sellers or lose the house? How can you protect yourself from problems? These are important questions and are the meat of this chapter, along with tips and checklists to make sure your purchase doesn’t turn into a disappointment.
Emotional Factors Are Important What a home is worth is a complex question, because no two homes are exactly alike. Appraisers rely on past sales of similar properties to establish a value. While that approach can put you in the ballpark, it usually ignores emotional factors that influence what a home ultimately sells for.
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A Survival Guide for Buying a Home
To illustrate, one home that was no bigger than others in the area sold for nearly $8,000 more than what similar homes had sold for. What did this frame cottage-style house have that the others didn’t? First, it had a lot of curb appeal. The owners installed vinyl siding and a new roof and kept the lawn and flower beds in top shape. White birch trees framed the house and contrasted with a dark green manicured lawn. It was one of those small homes you drive by and immediately think of home and hearth and swear you smell fresh bread baking. Next, the inside was freshly painted in a neutral color with newer carpeting, also in a neutral color. Nothing fancy, just a fresh clean look. No House Beautiful decorating here. Walk in, and there’s nothing to distract you from imagining your pictures, your furniture, and your ideas of how the house should be decorated. It was an emotional trip that three buyers took, and they ended up competing to see whose offer would prevail. With condos and co-ops, the interior emotional appeal is even more critical, since the curb appeal and exterior of all the units are the same. The buyer must get a favorable impression of the development first. If the development passes muster, then the unit that has the most appeal is the one that will sell first. Most experienced real estate agents agree that a home is really worth what someone is willing to pay. A home may have an expert appraisal for $200,000, but if the colors, the way it sits on the lot, or the floor plan don’t appeal to buyers, it can languish on the market and end up selling for $185,000 or less. Many sellers don’t understand this. They get an inflated drive-by appraisal from a lender for a home equity line of credit, and a price gets imprinted in their minds. Sometimes it takes months of being buffeted by the market and rejected by dozens of buyers before they get a clue that maybe they’re overpriced. On the flip side, a home may appraise for $185,000. But the colors flow, the decorating is superb, there are few homes for sale in the area like it, and five buyers are making offers. In this case, the selling price could easily end up at $200,000.
How to Determine What to Offer Luckily, the home you want to make an offer on will most likely fall between these two extremes. Even so, there’s always the pressure to act fast or risk losing your dream house. If you have good taste and like the home, chances are others will too—usually at the same time.
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FIGURE 5-1 Steps needed to find your dream home. Item
Action needed
Know how much home you can afford.
Get prequalified by a mortgage lender and have a letter verifying the amount.
Crystallize thinking on what you want in a home. The style, bedrooms, baths, etc.
Fill out the Home Shopping Checklist in Chapter 4.
Determine what area you like the best.
Follow the suggestions in the Do’s and Don’ts When Shopping for a Good Area chart in Chapter 4. Narrow down your list to the three best areas.
Look at homes in your price list.
Get a list of homes in your price range from your realtor, classified ads, signs, Internet, and driving through areas of interest.
Narrow down the list.
Look at homes and narrow down the list. Use the chart Narrowing Down Your Choices Checklist in Chapter 4.
Eliminate all the homes down to the one you want to make an offer on.
If you need to, go back and look at the homes on your final three list to freshen your memory.
Experienced agents can relate many instances when homes have sat on the market for weeks with no activity, and then suddenly several offers came in the same day. The first preoffer step is have your agent pull up a list of all the homes that have sold in the area over the past three months. Notice what the average listing price to sales price is. In a normal market, it’s in the 2 to 5 percent range. Next, look at the average days-on-market and compare with how many days the home you’re interested in has been for sale. A note of caution here: A home that’s been on the market for two or three months doesn’t mean it’s been sitting there with no action. There could have been offers that didn’t work out or a sale could have failed, putting it back on the market. The MLS (Multiple Listing Ser-
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vice) days-on-market counter is like a taxi meter; it doesn’t stop or slow down until the ride ends. So it doesn’t hurt to ask the sellers if they’ve had any deals that have fallen through. Next, looking at past sales of similar homes in the area puts you in the ballpark as to value. But, other data such as days on market, area list price to sales price ratio and why the sellers are moving help you fine tune the offer. A transfer, job loss, or some other pressure situation as well as the home’s condition are also important factors. Russ and Linda went this route when they bought their first home. Their lender pre-qualified them for a $165,000 conventional with 10 percent down. Their agent pulled up all the homes in the areas they were interested in between $160,000 and $170,000. The list totaled 27 properties. Going down the list with their agent, they were able to quickly eliminate 16 homes from the list—homes that were on busy streets, older homes that had not been updated, and styles Russ and Linda didn’t like. This narrowed the list down to 11 homes they would go through in the next day or two. The first five homes on the list Russ and Linda looked at were disappointing and not at all tempting. Number eight was a possibility, and the ninth home they went through clicked. It had the feel of home. It was exactly what they were looking for but priced at $167,900. Hurrying through the other two homes on the list confirmed their choice on the well-maintained multilevel on a cul-de-sac. Generally, if two or three homes on the list are possibilities, then going back through these homes a second or even a third time is the best way to narrow your choice down to one. Sometimes the hardest part of house hunting is deciding which home among two or three to write an offer on. Once you decide on the home you can’t live without, it’s important to put together an offer fast. It’s a competitive world, and other buyers have good taste also. Russ and Linda’s agent, Andrea, swung into action and looked at what other homes had sold for in the area. She noticed that the average listing sold for 98 percent of the list price, and the days-on-market was averaging 37. These are the numbers of a warm seller’s market, and Andrea didn’t think they should go any lower. Andrea also called the listing agent and found out that the owners were building a new home nearby and it would be finished in about six weeks. That meant pressure was on the sellers to get their home
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FIGURE 5-2 Questions and answers about writing up your offer. Question
Answer
What should we offer?
Have your agent look up what similar homes have sold for in the area the last few months. Check out the list price/sold price ratio and the days-onmarket of these sales. Find out if the sellers are under pressure to sell. Look at what concessions sellers are making in your area.
How low can we go and not lose the house?
If the average home is selling for 3 percent under list, that’s a good place to start. If it’s a competitive market, going much lower than this can cost you the house. If it’s a slow market, consider another 5 percent reduction in price or concessions.
How about concessions (seller paid points, buy-downs, and closing costs)?
It’s often more difficult to get the seller to pay both concessions and a price cut. If you need seller concessions to put the deal together, these will take priority over the price. You may even have to up the price slightly.
What other inducements can we offer so that the seller will accept our offer?
Sometimes timing is more important than money. Maybe a 60-day close or a close and rent back to the sellers for a few months will solve a problem. Find out what the sellers’ problems are and come up with a win-win solution.
What if the sellers are asking too much and won’t come down?
If your offer is fair for the market and the home’s condition, show them comparable homes that have sold in the last couple of months. If that doesn’t work, write up an offer where a certified appraiser sets the price. Put in writing that the sellers pay the appraiser if they back out. Otherwise, you pay for the appraisal.
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sold, so that should soften the price a little. The next step was to write up the offer and get it presented to the sellers. Russ and Linda decided to offer $163,500, about 3 percent less than the asking price and included the refrigerator in the offer. Andrea then called the listing agent and set up an appointment to present the offer to the sellers that evening. It’s important to note that when Andrea called the listing agent to set up the appointment, she didn’t disclose the price or terms of the offer. She didn’t want it shopped or used to leverage a competing offer if there were other buyers also looking seriously at the house. As it turned out, the buyers got lucky; no competing offers had come in. The prequalified letter convinced the sellers it was a bird-inthe-hand they shouldn’t pass up, especially when their new home would be finished soon. That the owners had just talked to their builder a few moments before Andrea arrived probably pushed up the pressure a notch or two to accept the offer.
What to Do When a House You Want Is Overpriced To some homeowners, their house becomes an extension of their egos. They overprice their home, reasoning that if the Adams home down the street sold for $180,000, then theirs must be worth at least $195,000, with all the neat decorating and wallpaper they’ve hung. How long it takes these homeowners to wake up to reality can depend on how much pressure there is to sell. If it’s a job transfer, it can be a couple of weeks. A good time gauge is the reason they’re selling. So, the first question you ask these sellers is why they would want to leave such a nice neighborhood and then listen carefully to their answer. If this is a home you really want, there are a couple of things you can do. First, you can keep an eye on the house, hoping the price will come down to what you think it’s worth. This, of course has its hazards—it might sell before that happens. Second, you can make an offer for what you think the house is worth. If the sellers reject the offer or counter with a price you think is still high, you’re back to square one. Joel and Penny had this problem when they wanted to buy a home near Penny’s mom, who needed help recovering from a hip replacement. They felt the home was overpriced for the neighborhood, based
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on comparable sales. The out-of-state owner priced the home based on what he wanted to get out of it and hadn’t gotten an appraisal. The seller rejected their first offer, so that put Joel and Penney back to the beginning; they didn’t know what to do next. They didn’t want to lose the house, but paying too much wasn’t an attractive option either. After talking over the situation with an appraiser, they decided to go back to the seller and offer the full price or appraisal, whichever was less. With this approach, a neutral third party ends up setting the price. This allows the buyers to get the home at fair market value and gives the seller a way out without having to admit he may have priced the home too high. Of course, the buyers have to know approximately what the home will appraise for so that they can get their financial ducks in a row before they make an offer. In Joel and Penny’s case, they had talked to an appraiser and knew about what the house would appraise for. To make a long story short, after a few phone calls back and forth, the seller accepted their offer, and the sale closed with both sides satisfied with the deal. On the flip side, buyers can also be blinded to market values and lose the home they want, especially when friends or relatives say they can remember when that house sold for $50,000 and they wouldn’t pay a dime over $70,000 for it today. It’s best to ignore this kind of talk and go with the advice of real estate professionals who know the market.
Sellers Are Emotional, Too Important and too often overlooked is the emotional connection. Sellers sell on emotion, just as buyers buy on emotion. So meet the sellers if possible when you go through a second time. Don’t gush and tell them they have the loveliest home in the world . . . that you can’t live without it. You don’t want to come across as too eager and compromise your offer. You just want them to see you as real people—as someone they would like to see live in their home and take care of it the way they did. In a hot market where you’ve got competing offers, you might write a letter to the sellers and attach it to the offer. Ryan and Susan did this when they presented an offer on an upscale home in a neighborhood where few listings come on the market. There were three
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competing offers, and their agent wasn’t optimistic about their chances. Susan decided to write a letter to the buyer expressing how they felt about the home and neighborhood. The feeling was that they had nothing to lose, so why not give it try. The two-page letter explained how they wanted their twin girls to go the nearby elementary and how much they liked the home and the effort the sellers had put into decorating and maintaining the home. Their agent thought this was a little weird, but then orders are orders, and he clipped it to the offer paperwork. That evening Susan and Ryan’s agent presented the offer to the Allbrights and their listing agent. It was the fourth offer and pretty much the same as the other three in price and terms. When the sellers read the attached letter, they looked each other and didn’t say anything for a few moments. Then Mrs. Allbright looked over at their agent and told her, ‘‘These are the people we want to live in our home . . . this is the offer we’re accepting.’’ The sellers were schoolteachers, and they identified with the buyers through their letter and felt they were the right people for their home. This approach may not work all the time, but it’s important to note that making a connection with the sellers on a personal level can’t hurt. Agents too often get caught up in the nuts and bolts of real estate and forget that it’s the human touch that frequently makes deals.
Getting the Sellers to Pay Concessions Even in a slow market, when you ask the seller to pay a hefty down payment and/or closing cost concessions to help you buy the house, you may have to go full price or over to make it work. The sellers may not have enough equity or may be unwilling to go the full amount you’ve asked. For example, if a home is priced at $157,000 and you want the sellers to pay $3,500 of your closing costs as a concession, you may have to add all or part to your sales price. The worst case would be $160,500 ($157,000 $3,500), and that opens the question of whether the home will appraise for that amount. A common response is that the seller will ask you to split the difference—up the price $1,750 and they’ll go down $1,750. Another common situation is that the sellers don’t have any equity in the home and have no room to maneuver because the home is
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priced where they walk away with zero. Then you have to decide if the house is worth upping the price and if it will appraise. In these cases, you’ll need to rely on your agent’s experience and knowledge of the market to guide you. In the end, determining what to offer is more art form than particle physics. Sellers often don’t even know what they’ll accept until a signed offer is on the table in front of them. Sometimes they’ll take offers they should counter and other times reject offers they should grab. It all comes down to the ebb and flow of the seller’s state of mind and what’s happening in their life at the time of the offer. In one particular situation, the sellers rejected an offer that was $3,500 lower than the listed price. However, the next day the sellers found out that an offer they made on a home in another state had been accepted. That changed everything. Money suddenly took a back seat to getting out of town as fast as possible. The sellers called their agent back and told him they had changed their minds and asked if he could retrieve the offer. They were now willing to sign! In most cases, you can tip the scales in your favor by giving the sellers a bird-in-the-hand feeling with a prequalified letter and doing your homework before writing an offer. But, in the end, it’s best to stay flexible. You seldom know what motivating factors are at work or when they may change.
Combining Grants and Seller Concessions Concessions can also be an important tool for getting into a home if you are down payment challenged, especially when there is a community grant/loan program. Goran and Nada went this route when they wanted to buy a home but didn’t have much of a down payment. The community they lived in had a program that would pay up to $4,000 to help first-time homebuyers in targeted areas. If the buyers lived in the home for five years, the loan was forgiven. The real estate market in the area Goran and Nada were interested in had a good supply of homes to choose from. They found one they liked and made an offer with the sellers paying $2,600 of the buyers’ closing costs, an offer the sellers eagerly accepted because their new home was just about completed. The possibility of having to make double house payments is usually a good seller motivator. With a
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FIGURE 5-3 Typical seller concessions. Item
What you get
Points and buy-downs
Each point equals 1 percent of the loan amount. Depending on the market, 2 points can buy down your interest rate about .25 percent. This can help you qualify to buy their house.
Closing costs
FHA/VA and other loan programs allow the sellers to pay for many buyer closing costs. Your lender can work up the amount you’ll need to ask for in the offer.
Paint, carpet, or other upgrades
In a slow market, this is a good way to upgrade the house a notch or two with no money out of your pocket. Get bids so you can ask for a specific amount.
Seller rent back
If you can’t move in immediately, the sellers can rent back for your payment. Typically, divide the monthly payment by 30 to figure out the daily rent. This can be a good way to go when you have a lease with a month or two left and you need to close to get a good interest rate.
Appliances that normally wouldn’t go with the house
Especially in a slow market, you can often get the sellers to leave a refrigerator or other appliances you need by including them in the offer.
Carpet and/or house cleaning
It doesn’t hurt to add in the offer that the sellers will have the house and carpets professionally cleaned when they move out. It makes your movein much nicer.
Home warranties and inspections
If the sellers haven’t already included a home warranty, write it in. You may get away with adding a home inspection, too.
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$2,600 seller concession added to the $4,000 community grant, the buyers had $4,600 and needed only $720 of their own money to close.
Filling Out the Paperwork Every state has its own real estate purchase agreements where you fill in the blanks. If you’re working with an agent, he or she will handle all the paperwork. If you don’t have one, you’ll probably need an attorney to ensure that the paperwork is filled out correctly and that you’re protected. It’s all too easy to get into a dispute with a seller over an earnest money deposit if the deal flounders.
Seven Ways to Protect Yourself and Get Your Offer Accepted 1. Make sure the offer is subject to you qualifying for the loan.
Even though you’re approved by the bank, you still need this protection. In one case, a buyer didn’t want to write a loan approval contingency because he was approved for the loan and didn’t want to weaken his offer. But suddenly, a few days before closing, he lost his job when his company had to lay people off because it lost a major contract. The loan approval contingency his agent insisted on putting in saved him from losing his $1,000 earnest money deposit. 2. Put in an addendum with a list of all items the sellers agree to include in the sale. Also, take digital photos of the items and create a print in album format (four to six images per page) and attach to the list. Every experienced agent has horror stories of sellers taking items on moving out that they shouldn’t have. Most common are appliances, light fixtures and chandeliers, air conditioners, ceiling fans, and window coverings. If you have an addendum—which the sellers must sign—with photos of the items, they are less likely to get loaded onto the mover’s truck. 3. Make sure you get copies of all documents, including the addendums numbered 1/x, 2/x etc. Getting a complete set of documents up front is the only way you can protect yourself from problems that can come up later on. 4. What are the sellers’ hot buttons or problems? The more of these you can solve for them, the better your offer, and many times they don’t cost you anything. For example, if they need to close in three weeks or less and you can speed up your financing, you’ve
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strengthened your offer. On the flip side, the sellers may be 60 days from having their new home finished. You can do a delayed closing or a 30-day (or whatever works) rent back after closing, where the sellers pay rent equal to your monthly payment. The key is to make your offer as hard as possible for the sellers to counter. Sometimes the terms, timing, or moving schedule are more important than the offer price. 5. Make your offer subject to a professional inspection. This is one of the more important contingencies. An inspection will cost you a few hundred dollars, but it can save you from making an expensive mistake. And if there are problems, you can use the inspection report to leverage a price reduction or repair concession. 6. Make sure your agent presents the offer in person. If the property is vacant and the sellers are not in the area, a conference call between the seller and both agents will work. You absolutely don’t want your offer faxed to the listing agent. She can shop the offer by calling other buyers and agents who have recently shown the house, trying to top it. One step further on this is to write the offer to expire on presentation. You don’t want your offer sitting on the sellers’ kitchen table for a day or so while their agent shops for a better deal. No way do you want your offer to motivate other buyers looking at the house to write just a little better offer and knock you out of the deal. 7. If you’re going in with an offer less than the maximum loan you qualify for on your prequalification letter, have the lender rewrite it for the offer amount. You don’t want the sellers to know that you qualify for $150,000 when you’re making a low offer for $135,000.
In one instance, an inexperienced agent cost his clients several thousand dollars when he presented an offer on a home $7,500 under the asking price of $142,500. The listing agent asked see the buyers’ prequalification letter and immediately noticed the amount they qualified for was $150,000. The sellers, under pressure to sell, would have taken the low offer, but when they saw that the buyers qualified for much more, they increased their counter $4,000.
Buying Bank Foreclosures and Short Sales Real estate owned (REO) is banker-speak for homes lenders have foreclosed on and now own. A short sale is when lenders agree to take
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less than the balance owed on a mortgage so that they don’t have to foreclose.
Buying REOs It costs in the neighborhood of $20,000 in attorney’s fees, administration, and carrying costs for a bank to foreclose on a property. In addition, if the home is damaged and needs work to make it saleable, the costs go up. So, when you make a low offer on an REO, the bank will look at the costs it has incurred on this particular home. It will also consider the chances of getting a better deal in the near future. If the market is slow and this home has been on the books for a while, the chances are good you’ll get your deal. In other words, the right timing helps. But, there’s also a caveat here. If the home needs work, you’ll have to tread carefully. Many times buyers get these homes and find out that the costs of restoration can equal or exceed the savings they hoped to get on their good deal. So, the first step in buying an REO is to go through the home carefully and make a list of needed repairs and what they will cost. Next, add the costs to the price you’re willing to pay for the home and compare with what similar homes have sold for in the area. This will guide you on what you should offer the bank. Hopefully, the REO committee will be in a good mood that day. On the other hand, if the market is hot and homes are selling fast, you’ll get a cold shoulder to a low offer. Also, if there’s bidding on a property and you’re competing with several other buyers, the chances of getting a good deal drop considerably. There’s usually an uninformed bidder who gets carried away and bids too much. In this case, you’ll want to walk away and look elsewhere for a good deal. When Shawn and Marie were looking for homes, they found an REO in a neighborhood they liked that was close to an elementary school their daughter went to. In going through the house, they found it in bad condition. The lawn was dead, the carpets were beyond cleaning, the appliances needed to be replaced, and five doors had holes in them. The first thing Shawn and Marie did was invest $350 for a profession inspection. They knew spending the money was a gamble, but they needed to find out exactly what it would cost to put the house in livable condition. After they got the inspection report back they shopped around for carpets, appliances, and materials and got bids for
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the work they couldn’t do themselves. Totaling all the costs, they came up with $13,578, including their inspection report. Getting together with their agent, the buyers pulled up on the MLS computer other similar properties that had sold recently. They noticed that about $175,000 appeared to be the market value. Also, looking at similar homes currently for sale in the area confirmed that price range. Shawn felt that if they were going to all that trouble fixing up the home, they should get a good deal. Putting a sharp pencil to the figures, they decided to offer the bank $150,000 for the home. Their agent wrote up the offer and attached a copy of the bids and repair list they had put together, along with the inspection report and the buyers’ mortgage prequalified letter. The package was mailed to the bank’s REO representative who was handling the home. About five days later Shawn and Marie’s agent got a call from the REO department that it had accepted the offer. The buyers had essentially gotten a home for about $10,000 under market in an area they wanted. Not a bad return on the work they would do to make the home their dream. The key to getting a bank REO committee to look at an offer is to include supporting data such as bids, cost lists, inspections, comparable sales, and a prequalification letter that shows the buyers are ready to go. Bankers like bird-in-the-hand offers, too.
Short Sales Can Be a Good Way to Go In a slow market, a home can drop in value below the mortgage balance—in mortgage-speak this is called upside down equity—and if the homeowner needs to sell, it can get ugly fast. One way to deal with this is a short sale. To get this option going, the homeowners need to contact the bank’s customer service department and see if they are willing to talk. Next, you’ll need to write a purchase offer and include a prequalification letter from your lender ready to fax to the bank’s representative who is assigned to the case. It’ll go to a committee that will think it over and get back to you with an acceptance, counter, or rejection. Whether the sellers’ bank accepts the offer depends on the market, how many payments the sellers are behind, and if your deal is less than the costs of a foreclosure. The bottom line is that you can sometimes get a good deal with a short sale, but you’ll usually need a lot of time and patience. Sometimes the sellers are cooperative because they want to save their credit. Other times they’ll give up part way through, and the deal will fizzle
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because the bank can’t deal with you as long as the sellers own the property. But it’s an option to keep in mind if you run across a seller with upside down equity.
Home Warranties Can Save You Money Buying a home does have some risk. You haven’t lived in the home, so you don’t know what works and what doesn’t, and the sellers may not be forthcoming about any problems. One tool that will help you minimize costly problems is a home warranty. For a one-time fee of $300–$500, you get a one-year insurance policy covering electrical, heating, and plumbing systems. Also included are built-in appliances such as dishwashers, disposals, compactors, and range/ovens. However, refrigerators, air conditioners, washers, and dryers usually are not included in the basic coverage of most policies but can be covered at additional cost. With most programs, if you have a problem you call the warranty company, which sends a repair person from its own local network of contractors. Since the contractor usually has a service charge of $35– $50 for each call, it pays to handle the small or inexpensive repairs yourself. The major benefit of a warranty is protection from problems you didn’t see during the inspection. But, it’s important to realize that most warranties don’t cover structural repairs such as a roof or foundation. There are, however, a growing number of companies that do offer— for a higher premium—coverage for structural and roofing work. Also, coverage of plumbing systems varies widely. Some policies cover all pipes—inside the home and out—but others don’t. You’ll need to read the fine print to find out what’s covered. One of the most important policy restrictions to look for is ‘‘preexisting conditions.’’ Many warranty programs don’t cover problems that may have been present and detectable before the policy went into effect. The coverage varies widely, so it’s important to read and compare policies carefully before buying.
Confused Buyers and Irregular Regulations Regulation of home warranties varies from state to state. In some states, the real estate commission is the regulator, but in others the department of insurance has jurisdiction. Also, the many different
102 Warranties. The term home warranty is also used by new-home builders and remodeling contractors to insure the foundation and structure of their projects. Unfortunately, the new-home warranty industry has had a lot of abuses and bad press. It has even has been the target of Congressional hearings. Many of these problems have come from builders ‘‘self-insuring’’ their warranties and homebuyers not insisting that everything be in writing. It’s important to realize that in the end a warranty is only as good as the company behind it. If the contractor goes belly-up, you’re left holding the bag. To prevent this, it’s a good idea to involve a third party insurer who backs up the builder’s warranty. One such company, Home Warranty Corporation, has provided new-home warranty protection for more than two decades. For remodelers, the Home Owners Warranty (HOW) Remodelers Program offers a oneyear policy against faulty workmanship and materials, and from three to ten years’ coverage of major structural components. Under this coverage, you still deal with the contractor, but if there’s a problem, HOW is there to back up the warranty. When you’re dealing with a contractor or builder: (1) Make sure the warranty spells out clearly all the terms, conditions, and limits of your agreement. (2) Chisel in stone: If it isn’t in writing—it doesn’t exist! (3) Even if it costs you extra to have a third party guarantee the warranty, it’s usually worth it to you for peace of mind.
A Survival Guide for Buying a Home
companies and policies have created confusion about what is and isn’t covered. As a result, many consumers have the misconception that a home warranty covers everything, down to a leaky faucet. In reality, the only way to find out what you’re getting is to read the policy over carefully and verify the company’s financial stability.
Four Things to Look for When You Buy a Policy Different regions require different emphasis on what is covered. In the Sunbelt, for example, air-conditioning and pool coverage are important, but in the Northeast, furnaces and sprinkling systems are a primary concern. Regardless of the area you live in, the important things to look for in choosing a policy are: 1. Make sure the insurer is financially
sound and has a good track record. The best policy is worthless if the company goes bankrupt. Look for companies tied in with substantial national corporations that usually advertise in your local Yellow Pages. Check with a real estate broker or two for companies they have had good experiences with. Also, it doesn’t hurt to verify customer references or check financial filings at the department of real estate or insurance. 2. Read the policy through and make
sure you understand what is and is not covered as well as what the company charges for the service fee. On the average, most service
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fees run in the $35–$50 range. But remember, it’s a matter of trade-offs, and the lowest service fee is not always the best deal. 3. Look carefully at the ‘‘preexisting conditions’’ part of the pol-
icy. Does the insurer require a presale home inspection before the policy becomes effective, and is there a time period before certain items are covered after you move in? 4. Make sure the optional coverage you want such as on a swim-
ming pool, air conditioning, or refrigerator is included. If a seller is furnishing only a bare bones policy, you may need to pay the extra cost for the options you want. It’s a good idea to read over the policy before closing, not when you’re moving in and the air conditioner dies on the hottest day of the year. That’s a bad time to find out that the seller gave you only a basic policy. Interestingly, a recent National Home Warranty Association survey of the California market found that 56 percent of the sellers bought policies to avoid potential lawsuits, complaints, and disclosure problems arising from the sale.
Home Inspections: Don’t Buy Without One Even though most states require sellers to disclose problems in writing to a buyer, it’s still buyer beware. A seller may fill out a multipage seller’s disclosure form, but at the time there’s no way to tell if it’s accurate. In reality, a disclosure boils down to the seller’s opinion on the condition of the house and its components. So, it’s best to use the disclosure form as a starting point and not assume that it’s totally accurate. Sometimes buyers hesitate to spend money on an inspection, having heard that homeowners must bring a home up to code before they can sell, that if the electrical or plumbing is not up to code it must be fixed before a home can close. In reality, this can be classified as an urban legend. Generally, sellers are not required to be code compliant when they sell unless it’s required in an offer. There’s no rule or law that states who has to pay to bring a property up to code. So if you buy a home, problems develop later on, and you had nothing in writing, you’re stuck with the bill. One buyer who learned the hard way was a handyman type who felt he didn’t need an inspection on a home he made an offer on. Since the home was only five years old, he reasoned that not that much could
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FIGURE 5-4 Seven reasons why you should get a professional home inspection. 1. There’s nothing worse than finding surprises after you move in. Problems the sellers didn’t know existed can surface, costing you big bucks. 2. It’s important to protect yourself from problems the sellers didn’t disclose or forgot to tell you about. 3. Many times you can renegotiate the price if problems are found that would cost you money down the road. 4. If problems are found, you’ll know how much it’ll cost to fix them. If you go ahead with the sale, it’ll be an informed decision. 5. Sellers will often correct any problems so they don’t lose the sale. But you’ll probably need a professional inspection listing the repairs before sellers will spend money to do the work. 6. Even though your Uncle Louie or Cousin Joe is a contractor, architect, or veteran homeowner, they’re not professional home inspectors. They’re not trained for it. It’s far better to hire a professional inspector and not put relatives or friends on the spot trying to pretend they know as much as a trained inspector. 7. Buying a home is a big, multihundred thousand dollar, 30-year investment. Why jeopardize both your investment and peace of mind for less than two weeks’ interest payment?
be wrong. Besides, he knew a lot about building, he had walked through the home twice, and everything looked fine. The sale closed, and a few days later the buyer started moving in . . . to a big surprise. In the bath off the master bedroom, there was no water because the plumbing was not hooked up. The fixtures were all in place, but no water or waste lines. The buyer had looked in, saw the fixtures, and assumed it was a working bathroom. Would an inspector have caught that chicanery? In a heartbeat! The best way to protect yourself from surprises is to hire a professional home inspector. It’ll cost you $250 to $475, but it goes a long way toward reducing the risk of buying an existing home. Even if you’re a building professional, you can’t think of everything in a walk through.
What a Home Inspection Includes Typically, home inspectors will spend a couple of hours going over the home and then write up a report detailing any mechanical, structural,
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or safety problems they’ve found. It’s important to note that an inspection is not an appraisal, municipal code inspection, or warranty. Since you’re a prudent buyer and will make your offer subject to a professional inspection, a bad report can give you reason to cancel the sale and get your earnest money deposit back. Or you can use the report to get the seller to renegotiate the offer and correct any problems. A typical example is Alan and Sandra, who found a 12-year-old home in an upscale neighborhood that was exactly what they were looking for. They felt so lucky to find the home that they didn’t want to jeopardize their offer by making it subject to an inspection. However, their agent insisted on the contingency, stressing that a few hundred dollars is cheap insurance when you’re investing more than $350,000. A few days later, the inspector met the buyers’ agent at the home. What should have been a routine inspection turned up major problems. The house had been damaged in a fire about eight years before and the repairs were less than professional. Several joists in the attic were charred and should have been replaced. Likewise, many damaged wall studs had been covered over with sheetrock. For the buyers, it was a disappointment to lose the house, but a relief that they had not made a costly mistake. In another example, Scott and Marissa’s inspection report came back with sev- Finding a home inspector: eral small but serious problems, such as To find a home inspector, an improperly installed furnace flue, no check the Yellow Pages in flex connector or strapping to secure the water heater, and no vents in the door to your area or go to the Web site www.ashi.com (Amerithe furnace room. In this case, the seller agreed to pay a can Society of Home Inspecheating contractor to correct the prob- tors) or www.nibi.com lems before closing. Typically, most prob(National Institute of Buildlems are handled this way because the sellers realize they have to take care of ing Inspectors). Talk to them or the house won’t sell. Once prob- three inspectors and get lems have been disclosed and docu- references. Also, make sure mented, sellers can’t claim they didn’t a return visit to confirm reknow on future disclosure forms without pairs is included in the fee. leaving themselves open to liability. Homesellers who may be tempted to hide problems are finding out that with
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home inspections and disclosure laws, selling as-is or with nondisclosure is going the way of snake oil cures. However, keep in mind that home inspections are still a largely unregulated industry. So use caution if the listing agent or seller insists on a particular inspector. It’s important for you to choose your own inspector. Check the Yellow Pages for a list of inspectors in your area. If the inspector is a member of the American Society of Home Inspectors (ASHI) or the National Institute of Building Inspectors (NIBI), that’s a plus. Also, if you’re unsure of the appliances, electrical, plumbing, or heating systems, you can write in the offer that the seller will furnish a home warranty policy. This policy insures these systems for one year after closing and usually costs $300–$500. Look in the Yellow Pages under home warranties for insurers in your area. As a final caution, it’s a good idea to schedule a walk-through inspection a day before closing. This is to make sure the condition has not changed, there’s no packing and moving damage, and no one has forgotten what stays and what goes. You don’t want to move in and find that the sellers removed the antique chandelier in the dining room you specifically included in the sale.
Appraisals: They’re Not Inspections Many buyers believe that an appraisal will uncover problems in a home. While it’s true that obvious problems will be flagged, appraisers are not home inspectors. An appraiser’s job is to make sure the property’s market value is in line with the sales price to protect the bank’s investment. To clear up this confusion, the Department of Housing and Urban Development (HUD) requires FHA buyers to sign a form affirming that they understand the appraisal is not an property inspection or warranty. HUD received many complaints from people who thought FHA appraisals should have found problems that surfaced after they moved in.
What an Appraiser Looks For Basically, home appraisers arrive at a value by looking at what similar homes have sold for in the area the last few months. They get comparables from public records, local multiple listing sales, and their own experience in the area. The appraiser schedules a walk-through to determine the condition and how the home compares with similar sales in the area.
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Since appraisers are human, they have their opinions and prejudices. Two appraisers can look at a home and come up with two different opinions, even though both are following accepted appraisal standards. They can also miss problems, make mistakes, read the measuring tape wrong, and all the other things people do. So what do you do if you get a low appraisal? If an appraisal comes in low and you disagree with it, most appraisers will listen to your argument. But, you’ll need to provide solid evidence that they missed the call. For instance, if you have some comparable sales in the area they missed, that helps. Or if the appraiser got the square footage wrong, you can tactfully bring it to their attention that a remeasure will confirm your figures. The appraiser is not your enemy, and you don’t want to make her one. If there are problems, it’s best to talk to the appraiser and find out why. Most of the time more data or repairs can resolve these problems.
Unrealistic Pricing Results in Low Appraisals A common reason for a low appraisal is a property that is overpriced for the area. This happens when sellers make structural additions, landscaping, and interior improvements that other homes in the area don’t have. When they sell and try to recoup the dollars they spent in improvements, they price the home way over what other homes are selling for in the area. Should a buyer come along and offer close to the asking price, the sellers’ expectations will crash head on with reality when the appraisal comes back. Real estate agents also contribute to low appraisal problems. Too often an agent inflates the value of a house in order to get a listing. Sellers should know better, but greed gets in the way. Hope springs eternal that lightning will strike and the agent can get them a higher offer. If a high offer does come along, the appraisal will inject reality into the sale, and a low appraisal will be the result. The most common result of overpricing is that the house will stay on the market through a series of agents and incremental price reductions. Eventually, the price will hit market value and a sale will occur. But, depending on the sellers’ circumstances and market conditions, that can take months or even years.
Appraisals and Repairs When an appraiser goes through a home doing a conventional loan appraisal, he is primarily concerned with value. Any obvious problems, of course, will be flagged and need to be repaired as a loan condition.
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FHA/VA appraisals are a little different. They are more thorough and detailed in their inspection. It’s not unusual for the appraiser to poke around in the attic, climb down in the crawl space, and check windows for cracks or failed seals. And a roof must have least three years of life left or it must be replaced. Appraisers not only look at value but also want to make sure the buyer won’t have to make any repairs for at least a year. Still, FHA/VA appraisals are not professional house inspections, nor are the appraisers trained to be inspectors. If you’ve made an offer on a home and the appraisal comes back with a list of repairs, the seller doesn’t have any alternative other than to do the repairs if the sale is to move forward. Sometimes, if there are extenuating circumstances like bad weather, a lender may allow money to be put in escrow for a short time so that the loan can close. But the old days of buying a home ‘‘as-is’’ are no longer an option when a lender and appraisal are involved.
The Unique Challenges of a Co-op or Condo If you’re planning on buying a condo, co-op, town house, or planned unit development (PUD), there are a few unique challenges that detached homes don’t have. Chapter 6 tackles these challenges and shows you how to shop for and get the best deal possible.
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Buying Condos, Co-ops, and Other Options
Many people buy a condo or co-op because they’re just starting out and don’t need or want the square footage and yard work. Others, in response to the empty nest syndrome, want to shed square footage, yard work, and maintenance cares. Regardless of your reasons for considering a condo, town house, or co-op, this chapter helps you navigate the obstacles to finding your dream home and getting the best deal. But an equally important part of the buying decision is the section on homeowners associations. They are the key not only to a good condo experience, but also to maintaining your home’s value.
Condos 101 Unlike detached single family homes, condo ownership is based on shared ownership and responsibility. When you buy a unit you normally get the interior airspace only. The ground and buildings are owned in common with the rest of the owners in the project. The second big difference in condo ownership is being part of the homeowners association (HOA). If you own a condo in a project you are automatically a member of the association. The members elect a board of directors to govern the affairs of the project subject to the bylaws. It’s the board’s job to enact and enforce the rules that, in view of the board and members, will make living in the project a pleasant and profitable experience.
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FIGURE 6-1 Condo shopping checklist. Item
What to look for
Area
Is it an upscale area close to shopping, colleges, or schools?
The project
Is the project well cared for? Is there any deferred maintenance? What’s the age mix of the owners?
Homeowners association
Do the owners appear happy with the current administration? Is there a management company involved in day-to-day operations?
Paperwork you should look at
Get copies of the bylaws, condo declaration, minutes of the last six meetings or so, and the financial statement.
Rentals
How many of the units are rented? What’s the percent of rental to owner occupied units.
Fees
What’s the current condo fee? How long has it been that amount? What’s the history of the fee increases?
Maintenance/replacement reserves
Are there any big maintenance items coming up like roof or siding replacement, road resurfacing, etc.? Are there reserves to handle these costs, or will an increase in monthly fees be needed?
Rules and regulations
Get a copy and read carefully. Can you live with these rules, or is there an item like RV parking you can’t live with?
Exit strategy
If you want to sell in a few years, can you do so? How are sales in the project going? Are the units holding their value?
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Condo Economics If you’re graduating from being a downtrodden tenant to home ownership by buying a condo, there are some economic realities you should be aware of as you shop around. First, in a mixed area of competing single family homes and condos, the condos will not appreciate as fast as detached homes in a normal market. In slow economic times, the condo market suffers first and is slower to recover. In urban areas that have predominately condos, this market competition with detached houses will not exist and normal supply and demand will govern values. Second, condos are more area sensitive than detached homes. If a project becomes run down or the area suffers because an off ramp or factory is built close by, values will sink to the bottom and stay there longer than an area of single family homes will. Next, since units in a condo project are similar and buyers move in at about the same time, it usually happens that when you want to sell, so will a lot of other owners. A three- to five-year selling bubble often occurs in new projects that attract first-time homebuyers. So, if you need to sell fast, it may be difficult because most of the units are the same, and price is all that sets you apart from the competition. A desperate-to-sell condo owner, who bottoms out his sales price, will hurt the whole complex. Lewis and Charlene had this problem when they tried to sell the condo they bought four years ago. Like most others in the development, they were first-time homebuyers and couldn’t afford the average $168,000 house prices in the area. The condo, with a fireplace, two baths, and two bedrooms seemed perfect at only $110,000. Monthly payments on a variable mortgage were less than rent, even with the $85 condo fee added in. The first two years of living there were great for Lewis and Charlene. They loved the location, pool, and lifestyle. Then a baby came along, and suddenly the future looked different. After two more years, they started thinking about a home with a yard. Their income had gone up, and they felt they could afford to move up. About then more for sale signs started appearing in windows around the development and were slow to disappear. Moreover, Lewis and Charlene’s mortgage balance was still about $108,000, since they had financed some of the closing costs. Some owners who had more equity were discounting their condos
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as low as $103,000, hoping to get a quicker sale. When this happens, your equity often becomes the difference between the loan balance and the lowest priced unit in the complex. In this case, Lewis and Charlene would have to write a check for $5,000 plus to sell their unit. In retrospect, they would have been better off to rent for a couple of years and save up a bigger down payment while their earning power grew.
Condos Are a Good Investment As Long As You Do Your Homework The example above is not intended to be a horror story to discourage you from buying a condo, but to point out that it takes a little more homework and savvy before you sign closing papers. In all fairness, it should be pointed out that this same situation can happen in a newer single-family home subdivision. However, in a condo project, the units are alike, so price tends to become the biggest sales factor. In a slow market, you have to underprice your neighbor, since you don’t have curb appeal, super landscaping, or a new vinyl fence to make a compelling difference. If you’re retiring and plan on staying in the condo for a long time, the selling bubble and market ups and downs won’t be as big a problem.
Have an Exit Strategy in Mind Too many first-time homebuyers visit new condo developments that push a fun lifestyle, owning-is-cheaper-than-renting sales pitch, along with attractive financing packages. They don’t think about what will happen when all the units are sold, the developer moves on, and the project becomes part of real-world economics. The bottom line is that if you know you’ll be moving up in a few years, you’ll need an if-we-buy-this-can-we-sell-it exit strategy in mind. Look at other similar condo projects in the area and check out how they’ve held their value over the past few years. Have your realtor pull the sold records for the past year and see where values are going.
Condos and Co-ops in Urban Areas In urbanized areas where condos and co-ops predominate and the competition with single-family homes is not a factor, the economics change. Condo values become a factor of supply and demand, along
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with the health of the local economy. The usual dynamics of real estate such as location, price, terms, and condition apply more equally. In other words, when you buy a condo in these areas, you’re competing condo to condo, and the playing field is more level.
Condos and Loft Conversions In many areas of the country where housing demand is greater than supply, apartments and even commercial buildings are converting to condos. Their main attractions are location and/or price. If it’s a trendy location near downtown or a university, you’ll pay a premium. Apartment buildings converted to condos offer ownership at attractive prices. But when buyers want to move up and find they can’t sell, they’ll rent their units. As more and more units are rented out, values can nosedive. Typically, one-bedroom units are at the bottom of the food chain and the most difficult to sell. If at all possible, go for at least a two bedroom. Remember, in an economic downturn, conversions are likely to lose more value faster than other types of housing. When Joe retired, he and Sandy bought a warehouse conversion in a great downtown location wanting to be close to cultural events and the Delta Center, where the NBA Jazz played. It was an upscale project that didn’t quite live up to expectations. The local real estate market cooled, and two years later not all the units had been sold. The developer discounted the remaining units in an FIGURE 6-2 Neighborhood questionnaire. Walk around the neighborhood and ask several owners the following: How long have you lived here? Do you feel the board is doing a good job? Do you have a management company, and is it doing a good job? Do you attend the association’s meetings? What do you like best about the community? What do you like least about the community? What do the dues cover, and how often have they been increased? Ask an adjoining unit about the soundproofing. This is the number one complaint of condo owners.
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effort to close the project. That dropped the value on the sold units several percentage points. If owners wanted to sell, they would have to compete with the new discounted units, and that would mean taking a substantial loss. So where did Joe and Sandy make mistakes? First, they bought into a new project when the housing market was strong, not taking into account that the area also had single-family homes in the same price range. In order for the loft development to hold its value, there would have to be a continuing hot market with little competition from condos and single-family homes.
Co-ops When you buy a condo, you own a percentage of the building and improvements—you own real estate. But when you buy a co-op, you are buying shares in a corporation that owns the building. In effect, you are leasing a unit from the corporation, and your monthly payment (assessment) depends on the number of shares you own. As a shareholder you have a vote in co-op matters. Usually, it takes a 2/3 or 3/4 majority—depending on the bylaws—to enact or change rules. Typically, co-ops are converted apartment buildings, hotels, or even warehouses. However, in some urban areas such as New York, San Francisco, or Chicago developers will build new units and sell them as co-ops. Since co-ops are corporations, a board of directors or co-op board runs the show. It sets the rules and can determine who is allowed to buy shares or what improvements you can make to the unit. For some people that’s a plus. Who gets to live in the building can be tightly controlled in contrast to a condo, where whoever has the money to buy a unit is in. But this is a two-edged sword. The exclusivity of a co-op can make getting your money out when you want to move harder and more time consuming than a condo. You pay a monthly maintenance fee and can also get a buildingwide assessment bill if revenues fall short of outgo. Although the board can’t discriminate based on race, sex, or religion, it can reject your application if it feels you won’t fit in. Also be aware that if you want to buy a co-op, the board will most likely want as much information on its application as a mortgage lender. Also in some areas, a seller doesn’t have to give you a seller’s disclosure form detailing the condition of the co-op. The seller is selling stock, not real estate, so a disclosure form is not required. This presents
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FIGURE 6-3 Comparison chart.
Home type
Ownership
Homeowners Association (HOA)
Fees
Condo
Your unit space Elected board of dionly. All else in com- rectors. Responsible mon. for buildings, grounds, and amenities.
Monthly fee covers everything but your unit’s interior and some utilities.
Co-op
You buy stock in a corporation that owns the building.
Elected board of directors. Can also have a say in who buys stock.
Monthly fee includes assessment, taxes, and most utilities.
Town house
You own the land and the unit it sits on.
HOA takes care of common areas only. Usually you take care of your unit’s exterior.
Monthly fee for common areas.
Planned Unit Development (PUD)
You own home and land and interest ownership in amenities such as swimming pool, golf course, and riding paths.
HOA takes care of amenities only. Some developments have restrictive covenants similar to condos and town houses.
Monthly fee for amenities upkeep.
Twin home
You own home and land.
Usually no HOA unless a group of twins are in a PUD.
Owners take care of their side.
a special challenge to you to make sure the co-op is in good condition. A professional inspection can be a good investment before you buy. If the co-op board is keeping costs down by deferring maintenance, you may want to look elsewhere. You also need to find out if the co-op board imposes a flip tax if you sell. This is a fee levied when a shareholder decides to move and sell their stock. The fee can be a percentage of the sale price (commonly 1 to 3 percent) or a set cost per share. It can also be based on the profit from a sale or how long you’ve lived there. Which formula is used
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boils down to what the board and co-op members can agree on. The big question on a flip tax is whether it will hurt you when you want to sell. Some brokers say it does, others say it depends on the co-op and the nature of the flip tax. If the co-op you’re looking at does have a flip tax, do a little extra homework and find out if it has caused sales problems in the past. Buying a co-op can also have special financial challenges. Co-op boards often require 30 to 50 percent down payments, and some boards allow mortgage financing for the balance while others won’t. Every co-op board is different, and practices differ depending on area. For instance, when Anita sold her New York co-op and moved to the West Coast, she discovered that a condo or co-op was all she could afford. After a month of house shopping, she finally found a co-op in her price range and filled out the application. A couple of days later she got word that the board had accepted her offer. ‘‘It was amazing,’’ Anita said. ‘‘When I bought my New York coop, the board ran a credit check, employment check, and called my references. Here in San Francisco the co-op board seems almost indifferent.’’ And the financing was up to her with no minimum down payment. Like condos and town houses, co-ops can be a good investment if you do your homework and buy wisely. Also, be aware that not all real estate agents are savvy on condos, less so on co-ops. Co-ops are a niche market, and you want to find an agent who works that niche. In New York City, for example, there are real estate brokers who specialize in co-ops and even in certain buildings. They know the market, the board members and their preferences, and can help you pass the board’s requirements. Ask board members what agents do the most business in their co-op and talk to two or three to find the one you’re most comfortable working with. Be aware, though, that in most areas, New York included, condos tend to hold their value slightly better than co-ops. This is due to fewer selling restrictions on condos, and when you own the unit, you have more control. A great Web site for co-op buyers and owners is www.cooperator .com. It also publishes a magazine for co-op and condo owners, especially in the New York City area.
Town Houses Up a notch on the food chain are town houses. They are often built in rows and can be single or two story, with each unit having a small yard
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or patio. The grounds and structures are still owned in common and maintained by the homeowners association. Town houses tend to hold their value slightly better than condos, but they still suffer from many of the same problems if you need to sell in a hurry. So when you shop for a town house, zero in on projects that have a great location, good amenities, and a homeowners association that keeps the grounds and buildings in good condition. Also, check out the number of units that are rentals; anything over 10 percent should raise a red flag. Proceed with caution if: The developer couldn’t sell the units and rented them out to generate cash flow. The project didn’t sell well, so the developer discounted the units and investors bought them for rentals. The project went into foreclosure or bankruptcy, and the bank took over the project and liquidated the units attracting bargain hunters and investors. The life cycle of the project is at a point where the original owners want to move up or sell and can’t, so they rent their units and values ratchet down. There is also opportunity in these situations for a buyer who is looking to downsize or retire. You can get a great deal if you’re willing to ride out the market and get active in the homeowners association. Eventually, the rentals will sell and the project will stabilize, as more permanent homeowners move in. Many projects that go through this cycle end up becoming desirable and upscale communities, although it may take a few years to do this. The key to finding these potential winners is to look for location. A development may be going through problems now, but if it’s attractive and has a good location, it will eventually become a winner. Interestingly, FHA usually won’t insure loans on projects that are more than 50 percent rentals and Fannie Mae limits its lending on projects with more than 49 percent rentals.
PUDs (Planned Unit Developments) PUDs can be clusters of single-family homes or attached town house style units with common areas such as club houses, swimming pools,
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and tennis courts. The big difference is that you own the structure and the land it sits on, plus a small yard or patio. PUD financing is the same as single-family homes, since you own both the dwelling and the land. But, you’ll probably have to factor the HOA fees into your qualifying ratios. PUDs are becoming popular in areas where land is scarce and expensive. By putting homes on small lots, developers hope to keep home costs down to where they will sell reasonably fast. You’ll want to beware of PUDs that have too many look-alike homes jammed on small lots; the project can take on a sterile, impersonal look. This is not the type of development that creates homeowner pride. And homeowner pride is a key component of an area that maintains and increases its value. Because many PUDs have similar market economics as condos, you should also look at the owner to rental ratios. A PUD that has a lot of rentals is going to have a problem keeping its value. Actually, a neighborhood of single-family homes in a standard subdivision with more than 10 percent rentals can have the same problem too. PUDs are becoming more popular because the monthly fees are lower than condos, and you have more control over your home. But, you still don’t have quite the same freedom as the usual subdivision, because the homeowner restrictions are stricter to protect everyone’s investment. The biggest downsides of PUD living are that you may not agree with the restrictions and you pay the monthly homeowner fee whether you use the amenities or not. Loren and Dora found this out when they retired from Boeing and downsized to a smaller home in an upscale PUD. It was a new development, and they enjoyed making friends as more people in their age range moved in. Soon, phase one sold out and the homeowner association assumed management of the project. The first few years were fun. Dora was active in the homeowners association, while Loran improved his golf swing. But when new people were voted into the homeowners association, things began to change. New rules were proposed by the new administration and passed. Restrictions were made, such as that you couldn’t keep RVs next to your house or garage doors open for more than a certain period of time, and grass had to be cut twice a week. It was an attempt by the homeowners to maintain the image and value of their community. Loren and Dora had a small motor home and parked it next to
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their house on a concrete extension of their driveway. They were given notice by the association that it had to go. Also, the association’s enthusiasm for the new rules grew, and soon maintenance personal were instructed to knock on doors or leave notes on the doors of homeowners who were slow to comply. For most of the homeowners, it wasn’t a big deal, but for Loren and Dora, the restrictions and their deteriorating relationship with the association officers were too much, so they decided to sell. It wasn’t long before they found a buyer and ended up making a good profit, which, ironically, was due in part to the association’s working hard to maintain its image as a quality place to live. The lesson learned here is that before you buy a home in a development that’s managed by a homeowners association, check out the bylaws and rules. Look at the lifestyles of the people who will be your neighbors. Ask yourself if you would be comfortable living there for a few years.
Twin Homes A twin home is basically a duplex with each side owned separately. Or, in other words, two single-family homes connected by a common wall. You’ll find twin homes in PUDs, subdivisions, or in twin home neighborhoods built in or next to single-family home projects. They attract mostly first-time homebuyers and retirees scaling down. Developers build twin projects when land costs are so expensive that a higher density is needed to keep costs down. They may also build a twin home or condo project in order to satisfy federal or local housing regulations that require a certain amount of low-income housing. The economics of twin homes are more similar to PUDs than to single-family homes. If you buy a unit and find that your neighbor likes to restore cars or doesn’t like to do yard work, you’ve got a problem. A well-maintained twin with great landscaping joined to a neighbor who is a slob will suffer a big loss in value. If the project is a couple of streets of twin homes tacked onto a subdivision without strong CC&Rs (covenants, conditions, and restrictions), there’s not a lot you can do. Andy and Pat found this out when they bought a twin as their first home near a mid-priced subdivision. They liked the area, but couldn’t afford a single-family house; they could qualify for a twin. The neighbors, also first-time homebuyers, were great, and everything went smoothly for a couple of years.
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Then a slowdown in the local economy forced several large businesses to lay off people, and Pat and Andy’s neighbor was one of the unlucky ones let go. A for sale sign followed, but after several months of no action, the bank foreclosed and an investor bought the twin for a rental. The tenants didn’t take care of the yard, the grass died, and it soon became an eyesore, making it impossible for Andy and Pat to sell their side. Eventually, they too sold their side to the investor for what they owed, losing equity and about a thousand dollars in closing costs. To be fair, this situation could have gone in a different direction. Suppose Pat and Andy had bought a rundown twin at a great price, moved in, and fixed it up. After a year or two, the economy improved, interest rates dropped, and an entry-level housing shortage developed, causing housing values to skyrocket. Homeowners like Pat and Andy could sell, make a good profit, and move up to a bigger home with a hefty down payment. It’s like playing the stock market. If you can buy low and the market goes up, you make a profit. Unfortunately, for most people their housing decisions depend on what’s happening in their life at the moment and not on the business cycle. When that happens, making or losing money in real estate becomes a toss of the dice. A little planning and homework can improve your timing considerably, so you can move up with a big down payment. So, if you find a great deal in a twin home project, do the same homework you would do when considering a condo. Especially important, meet your neighbor and make sure you’re compatible before you sign the purchase agreement. If the other side is a rental, an oversize red flag is waving frantically. To put a positive spin on it, perhaps you could eventually buy the other side too and have a duplex. Twin home financing is the same as detached single-home financing, because the homeowner owns both the structure and land.
Financing Condos and Town Houses Condos and town houses pose a few financing challenges that singlefamily homes don’t have. Namely: When you apply for financing, the lender will add the condo fee to the payment and then run the ratios. For example, a $1,000 a month mortgage payment at 6 percent interest equals a $166,792 loan. But if
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you buy a condo with a $115 a month condo fee, your loan amount drops to $147,611. This means you can buy more of a single-family home on a given income than you can a condo. Conventional lenders generally prefer no more than 40 percent rentals in a project (the FHA currently says that 51 percent must be owner occupied). They’re so sticky on this that when you make application for a condo loan, you’ll most likely be given a form for the homeowners association to fill out verifying the percentage of rental units. With new developments, conventional lenders like to see at least a one- to two-years track record and 50 percent of the units sold before they’ll make loans. To get around this situation, developers often arrange for financing with a lender who will warehouse (keep the loans in-house) the loans for a year or two before selling them on the secondary market. This is another reason to pick your condo project carefully and look at its history and rentals to owner-occupied ratio. If the project has too many rentals, you may not be able to sell at any price if a buyer can’t get reasonable financing.
Financing Co-ops Co-op financing is different from condo or town house financing. Many co-op boards set the minimum down payment you must come up with. The remaining is usually financed by lenders who specialize in co-op financing. Since these lenders can’t use the property for security, their terms may be more credit driven than the usual real estate financing. Real estate brokers and co-op boards will often have a list of lenders who finance their units. Also, be aware that many co-op boards will not allow shareholders to use their stock as collateral for loans once the original share loan is paid off. So you may not want to pay off a co-op loan early. Unlike single-family homeowners, you won’t have access to low interest home equity loans if you need one.
Homeowners Associations If you buy a condo, co-op, PUD, or town house, the homeowners association will be an important part of your life. Also, some singlefamily home developments have homeowner associations to manage community pools and recreation facilities. How well you mesh and get along with your association can determine the quality of life where you live. This section covers how homeowners associations work and gives
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you tips on how to make your interaction with them enjoyable and rewarding.
How Homeowners Associations Work First of all, a homeowners association is usually a corporation that has a set of articles of incorporation that defines the purpose and powers of the association. The articles of incorporation are filed with the state the development is in. The bylaws of an association contain the basic governing rules. They can be amended or changed by majority vote of the members, subject to state statutes that govern homeowners associations. Ideally, the community is run like a small city government, with elected board members representing the will of the owners. Federal laws as well as local ordinances and laws such as zoning, building codes, parking, and traffic restrictions and even resale regulations and rent control provisions apply to homeowners associations and CC&Rs. CC&Rs are the rules that govern what you can and can’t do with your property. For better or worse, it’s one of the homeowners association’s responsibilities to enforce these rules to protect the value of the community. Conflict between the association and the homeowners can arise when differing interpretations of the rules occur. Some owners want strict rules and uniformity to keep values high, while others give individuality and a looser interpretation higher priority. The number of directors, term of office, and duties are found in the declarations, articles, or the bylaws. Most boards have three to five directors or an odd number to avoid voting deadlocks. Terms of elected office are usually for one to three years. However, if there are five or more members, the terms are usually staggered.
Do Your Homework Before You Buy Since the decisions of the board have a big effect on you and your pocketbook, it’s important to get a copy of the bylaws and read them before you commit to buying in a CC&R governed development. Getting copies of the last several board meeting minutes can’t hurt. They can give you an idea of what problems the development has and if any major cost assessments are looming. It’s also good to know how much the association has in reserve. Sarah learned about the importance of checking the association’s
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finances the hard way. After she bought a condo, she learned that the secretary/treasurer had been arrested for embezzlement of nearly $13,000 from association funds. A special $400 assessment was levied against each homeowner to make up the loss so bills could be paid. True, this may rarely happen, but you could buy into other problems that can easily cost as much if you don’t check the finances.
Make Your Offer Subject to an Audit When you buy a condo, you’re investing a lot of money, time, and energy into what will hopefully be a happy home. To make sure this doesn’t turn into a disappointment, make your offer subject to your approval of the association’s financial documents. It should be the seller’s responsibility to get you the following paperwork from the association: 1. A copy of the association’s financial statement. 2. Copies of bylaws, CC&Rs, and articles of incorporation. 3. Copies of the minutes for the last six to twelve meetings. If
there aren’t any, that’s not a good sign. 4. A copy of the reserve study that outlines the repairs that can be
expected in the future and how much of the current assessment is going into that fund. For example, if the project has 200 units, a clubhouse, and a swimming pool and there’s not enough money to meet future pool and reroofing costs, you’ll be buying into steep assessments in the future. These documents, along with talking to at least three residents in the project, should give you a good idea of whether this community is for you. All this homework is worth it if it’ll save you costly selling and moving expenses later on.
All About Green or Condo Fees Typically, green fees cover grounds maintenance, insurance, garbage removal, snow removal, and amenities upkeep. Some communities include cable TV or other perks that the majority of homeowners are willing to pay for. Here again, you want to look at the community closely to see if you’ll fit in. A clubhouse, swimming pool, and tennis courts are great if you use them. But if all you want is a quiet condo to get away from yard work, you’ll soon resent the higher fees.
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Not surprisingly, one of the biggest areas of contention among homeowner association members is finances. If the board is responsible and runs the association professionally, it will accumulate a reserve. However, this doesn’t always happen. So it’s important for you to find out before you buy how much money the development has in reserve. Otherwise, you may get an assessment (one-time bill) or a hefty increase in your monthly fee right after you move in. Homeowners associations have the right to put a lien on your unit if you don’t pay an assessment or the monthly fee. Also, if you break the rules or incur a fine, it’s going to cost you, and there’s not much you can do about it. So what can you do if you don’t like the way your fees are spent? You exercise one of the basics of American democracy and get enough neighbors together to vote in a new board or have a recall election. The project’s bylaws and articles of incorporation contain the rules for elections and picking board members. A must-read manual for anyone who buys a home in a project with a homeowners association is Joni Greenwald’s book Homeowner Associations, A Nightmare or a Dream Come True? (ISBN 0-9659166-0-X). Do the Walk Before You Sign Before you sign a purchase offer, conduct a reality check and walk through the neighborhood. Ask at least three neighbors the following questions: How long have you lived here? Do you feel the board is doing a good job? Do you have a management company, and is it doing a good job? Do you attend the association’s meetings? What do you like best about the community? What do you like least about the community? What do the dues cover, and how often have they been increased? Ask someone in an adjoining unit about the soundproofing. This is the number one complaint of condo owners.
The bottom line is that condos can be a good way to go, and there are many areas that have a stable market where you can build equity. However, you don’t have as big a margin of error with condos as you
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do with detached homes. This is why your homework and planning have to be a little more rigorous. If you buy a condo or co-op, your insurance needs will be slightly different than if you buy a detached single-family home. Chapter 7 covers what insurance policies you’ll need and how to shop for the best deal.
FIGURE 6-4 Final reality check before you sign. Item What’s the real estate market like in the area? According to MLS sold statistics, have the values held their own or gone up? Based on the local economy and housing demand, does it look like you’ll be able to sell down the road and not take a loss? Check out similar developments in the area. Have they held their value, or are sellers discounting to get out? How many units in the development you’re considering are rentals? Are developers building new projects in the area that will saturate the market in the near future?
Your Research
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C H A P T E R
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Insurance Matters for Homeowners For many homebuyers, insurance is a back burner item that has to be done before closing or just another cost that appears on the closing statement. But, that’s changing in a big way. Many areas with a history of high insurance claims such as Florida and Texas have experienced skyrocketing rates, more exclusions, and closer scrutiny of applicants. Some states are also revising their purchase offers to include a provision that In Texas, policies vary makes the offer subject to the buyer being somewhat from policies in able to obtain homeowners insurance. Actually, there are several different inother states. The Texas surance policies that are part of every Insurance Department home sale, namely, homeowners, flood, (www.tdi.state.tx.us) has private mortgage insurance, title insurdetailed information on its ance, homeowner warranties, and somevarious homeowners’ times mortgage life insurance. These policies stay in the background, hardly policies. noticed until a problem occurs; then they become very important. Dale and Janelle found this out just one day after they closed on an updated bungalow they found in an upscale but older area. They had a professional inspection on the property, and the inspector didn’t find any problems. During the move in, Janelle turned on the tub and another faucet to flush out the drains but got distracted for a few minutes and let the
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water run. Later, when she went downstairs, she found to her horror that there was a foot of water in the basement. Water had backed up through a floor drain in the laundry and flooded the finished basement. A plumber, in checking out the line to the street, found that tree roots had invaded the sewer pipe and created a partial obstruction. Normal flow of a toilet or faucet was not a problem, but the line couldn’t handle the larger volume from two faucets opened to full force. The damage was considerable, with soaked sheetrock, carpets, and some furniture. Luckily, Dale and Janelle had a good homeowner’s policy (HO-3) that paid for the damage, less their $500 deductible. With so many unknowns that can carry a big price tag, homeowner’s insurance and some of the other insurance options become an investment, not an expense. This chapter covers these different insurance programs that are important to homeowners, along with how to shop for the best deal.
Homeowner’s Insurance 101 A good homeowner’s policy protects you from the double whammy of having your home damaged or destroyed and still having a mortgage to pay off. The mortgage people know this, and they want to protect their security. That’s why many lenders collect one-twelfth of the yearly premium each month with your payment. Each year, when the policy comes due, the mortgage company pays the bill from the funds collected and held in an escrow account. If you have a conventional loan with a 20 percent or more down payment, you can handle the policy payment(s) on your own. FHA and VA insured programs, however, still require the monthly escrow for taxes and insurance on all their programs. You don’t want to forget to renew your policy if you’re handling it on your own. Your former insurer will notify the mortgage company of the lapse and the company will cover your home with a single vendor policy. These policies protect the mortgage company’s interest only and are expensive, costing you about double what a homeowner’s policy would. So you don’t want to let your homeowner’s policy lapse; it can be expensive.
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Policy Options Homeowner’s insurance evolved in the late 1950s, when the insurance industry needed a single comprehensive policy to cover not only the house, but also the contents and liability. The standard policy has two parts: property insurance and personal liability. The most common policy, HO-3, covers the house and other structures for everything except flood, earthquakes, and other policy exclusions. This is the policy that most mortgage lenders require you to carry as a loan condition. Other options are HO-2, which is a cheaper policy, and HO-1, a bare-bones policy that covers only risks that are specifically insured, but it is not available in most states. HO-4 is designed for renters, and HO-6 covers condominiums and co-op owners. HO-8 is designed for older homes and reimburses you for damage on an actual cash value basis. That means replacement cost minus depreciation. Depending on the area and house, full replacement cost policies may not be available for some older homes. In fact, they are getting harder to find in just about all areas.
Standard Coverage Before you hire a contractor or subcontractor, get proof of the contractor’s license, workers’ compensation coverage, and a general liability policy. If a worker is injured on the job (your house), you could be held liable. Second, contact your insurance agent to make sure you’re covered. Visit www.iii.org and click on home and then Insurance Needs When You Remodel Your Home for tips.
The standard policy (HO-3) typically covers damage to both structures and personal property from fire, lightning, windstorms, hurricanes, tornadoes, hail, explosions, aircraft, vehicles, smoke, theft, vandalism, falling objects, damage from ice, snow, or sleet, and freezing pipes. Personal liability is also covered if you or your property injures someone. Just about everything is covered unless specifically excluded. Typical exclusions are flood, earthquakes, neglect, intentional loss, earth movement, power failure, and damage caused by war. Also, if you have a loss and the building codes have changed, increasing the repair or replacement costs, you’ll pay the difference. For example, if you have a fire and your home’s electrical system is an older
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FIGURE 7-1 Different types of homeowner policies. Type of Policy HO-1
What it covers Bare bones policy. No long available in most states.
HO-2 (broad)
Covers most perils. Also available for mobile homes.
HO-3
The most popular policy. Protects from all perils except those excluded in the fine print. Typical exclusions are flood, earthquake, war, etc.
HO-4
Renter’s policy. Protects possessions only against the same perils as HO-3.
HO-6
Homeowner’s policy for condo or co-op owners. Covers what you own against the same perils as an HO-3. A master insurance policy covering the structure is included in your Homeowners Association fees.
HO-8
A policy for older homes. Reimburses you for damage on an actual cash value. In other words, replacement cost minus depreciation. This policy will not usually reimburse you for the costs of bringing a home up to code.
Policy options to the above Actual cash value
Will replace home and possessions minus a deduction for depreciation.
Replacement cost
Pays the cost of rebuilding/repairing the home or replacing possessions without a deduction for depreciation.
Guaranteed or extended replacement costs
Offers the highest level of protection. Pays whatever it costs to rebuild your home to what it was before the disaster. You may need an Ordinance or Law rider to pay for any costs to bring home components up to code if the home is dated. This policy may not be available for older homes. Some companies will go only 20–25 percent over the policy limit on this type of coverage.
60 AMP fuse system, you’ll end up picking up the cost to upgrade it, plus all other upgrades needed to bring the home into code compliance. Also, there are limits on the losses that can be claimed for items such as cash, furs, jewelry, or hobby collections. You’ll need to decide if you want to buy supplemental coverage to increase your protection. One worthwhile supplemental item is coverage for living expenses if your home is destroyed or damaged and you have to move out for a while. It covers hotel bills, restaurant meals, and other living expenses incurred while your home is being rebuilt. Coverage for additional
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living expenses differs from company to company. Many policies provide coverage for about 20 percent of the insurance on your house. You can increase this coverage, however, for an additional premium. Some companies sell a policy that provides an unlimited amount of loss-of-use coverage but for a limited time. It doesn’t take much damage to a home for you to be glad you added this option to your policy.
Replacement Coverage Most insurance companies offer replacement cost coverage. For an additional 10 percent or so, insurers will pay what it costs to replace your home and belongings up to the amount of your coverage. For example, if your TV set that cost you $700 is damaged in a fire, you’ll get the full cost covered. But, under standard coverage, you would get the replacement cost minus depreciation. In the case of electronics, the depreciation schedule is steep. You would be lucky to get 50 percent, or $350, for the TV. Or, a $50,000 tile roof that’s rated for 20 years and your home burns when it’s 10 years old would get you a $25,000 reimbursement for the roof under standard or actual cash value coverage. Extended coverage is the minimum you should carry if you have a high LTV (loan-to-value) mortgage. With standard coverage, a major fire would most likely leave you with an insurance check many thousands of dollars less than your mortgage balance. This is why many mortgage lenders require you to have this level of protection.
Extended and Guaranteed Replacement The next step up in coverage is extended replacement. You insure the home for the appraised value, and the policy will pay up to 125 percent to cover unforeseen problems. But the best protection is guaranteed replacement cost, which has no present limit on what it’ll take to replace your home and contents. However, because of big losses in recent years, many insurance companies have dropped this policy. You may have to shop around to find it, but it’s definitely worth considering. You’ll need this rider if you buy an older home. Don’t assume that if your policy reads guaranteed replacement that you’re fully covered in case of a disaster. The guarantee can mean different things with different companies, but it usually applies if the cost of rebuilding a home is higher than the face value of your policy. If you buy an older home, chances are some of the wiring, plumbing, heating/ cooling systems, and structure may no longer meet newer
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FIGURE 7-2 What your policy covers and doesn’t cover.
Possible claim Fire or lightning
Basic HO-1
Broad HO-2
Special HO-3
Renters HO-4
Condo HO-6
Older home HO-8
yes
yes
yes
yes
yes
yes
Windstorm or hail
yes
yes
yes
yes
yes
yes
Explosion
yes
yes
yes
yes
yes
yes
Riot or civil disturbance
yes
yes
yes
yes
yes
yes
Damage by aircraft
yes
yes
yes
yes
yes
yes
Damage by vehicles
yes
yes
yes
yes
yes
yes
Smoke damage
yes
yes
yes
yes
yes
yes
Vandalism
yes
yes
yes
yes
yes
yes
Theft
yes
yes
yes
yes
yes
yes
Volcanic eruption
yes
yes
yes
yes
yes
yes
Damage from ice, snow, or sleet
no
yes
yes
yes
yes
no
Falling objects
no
yes
yes
yes
yes
no
Interior water damage from household plumbing, heating/AC, or appliances
no
yes
yes
yes
yes
no
Freezing of pipes and appliances
no
yes
yes
yes
yes
no
Electrical overload damage to wiring
no
yes
yes
yes
yes
no
Note: additional and specific perils can be added to your policy such as earthquake, mudslide, and extra valuables coverage.
building codes. If you have a fire, the insurer is required to replace what you had, not what you’re required to have in order to rebuild. So here’s the catch—when you rebuild, you’ll need to include the newer building codes and upgrades. That expense isn’t included in your policy. And those upgrades can cost you a bundle. You can solve this potentially expensive problem by getting Ordinance and Law coverage. This is a rider to your policy that applies to
132 Importance of building codes: Building codes have to do with fire or life-safety issues. In general, a building permit is required when you remodel or add to your home. A building inspector comes by at different stages to make sure your improvements conform to the local building codes. Also, if you make improvements that require a permit and don’t get one, the insurance company will void its coverage if you have a fire or other problem. Renovating without a permit can come back to haunt you when you sell and the mortgage lender asks for proof of compliance. In addition, insurance companies are now rating states and cities on how well they enforce their building codes, and your insurance costs may depend on that rating. Check out www.codecheck.com for more information.
A Survival Guide for Buying a Home
the costs of upgrading your home to meet existing building codes. However, keep in mind that this rider will pick up the tab only for bringing the damaged part of the house up to code. It will not pay for bringing the undamaged part of structure up to code. In other words, you could be better off if the house were totaled rather than partially damaged. Rick and Andrea had this happen when they bought a 1940s brick bungalow with the dream of restoring it. They loved the wood floors and trim, the brick construction, and the wide front porch. The home still had the old-style wiring through a fuse box that should have been the first upgrade project. But Rick and Andrea were excited and instead started on the floors, wood trim, and interior decorating. Sometime during the second week of restoration, debris got into an electrical receptacle after the faceplate was removed. The old wiring sparked and ignited partially stripped wallpaper and engulfed the wall in flames. Fortunately, the fire department was close and reacted quickly. Only the front part of the house was gutted. After getting together with the insurance adjuster and their agent, Rick and Andrea were shocked to find out that it would cost them more than $12,000 out of their pocket to restore the house. Their insurance policy would restore the home to ‘‘as was’’ condition but not pay to bring it up to code. And they could not get a building permit unless the house incorporated building code upgrades. So what’s the bottom line of all this? If you buy an older home, make sure the home inspector gives you a list of items
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that don’t meet current building codes. Wiring and heating systems are often at the top of the list for potential fires. As your budget allows, upgrade those items on the list that don’t meet code first. By doing this, you’ll not only make your home safer but also increase its value. If disaster strikes, it will be replaced to ‘‘as was’’ condition, and you won’t be out the money you spent on improvements. Also, be sure to keep all the contracts, receipts, and paperwork in a safe place so that you can document these improvements. This is where photos or a video can be worth thousands of dollars to you.
Three Components of a Homeowner’s Policy It’s important to look at your basic policy components: structure, personal property, and liability to see if you have enough protection. Even if you don’t live on the San Andreas fault or collect antique firearms, you’ll probably need to get additional coverage for peace of mind.
Structure Many common problems such as earthquakes, floods, failed sump pumps, and backed-up sewers aren’t covered in basic policies. To get this additional coverage, you’ll need to add endorsements or riders. The higher a certain risk is for your area, the more important it is to add this coverage. Coverage for sewer clogs is usually less than $50, but it’s a must, especially for older homes. A sewer backup is especially expensive because it takes special cleanup procedures caused by contamination. This is why Dale and Janelle had to call in a disaster cleanup company to handle their sewer backup mentioned earlier, and it added a couple of thousand dollars to their cleanup costs.
Personal Property All polices include coverage for the contents of your house, but often the amount isn’t enough. Basic plans commonly pay 50 to 70 percent of the policy amount. For example, a $175,000 policy would likely give you anywhere from $87,000 to $122,000 for the contents. This may sound like a lot, but when you go through your home and total up everything you’ve got, it’ll be a shock. The value adds up fast when you total furniture, electronics, wardrobes, power tools, a stamp collection, and so on.
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If you have expensive items such as gun or art collections, antiques, jewelry, and computer equipment, you may want to consider extra coverage based on their actual value.
Liability Most policies have a $100,000 minimum liability that protects you in case someone is injured on your property. Whether that’s enough depends on how much you have to lose if someone sues you. You can pay for more protection or add an umbrella policy that covers you for incidents away from home also. For a home business or office with people coming to your home, your liability can skyrocket. Adding a $1 million umbrella policy for about $200 a year makes good sense.
Condo and Co-op Insurance If you own a condo or co-op, you’ll be dealing with two policies. The homeowners association or co-op board will have a master policy that covers the common areas such as roof, basement, elevator, boiler, and walkways for both liability and physical damage. The other policy (HO-6) that you are responsible for getting covers your personal possessions, structural improvements to your apartment, and additional living expenses. It also covers you for fire, theft, and other disasters listed in your policy, as well as liability protection. To insure your apartment adequately, it is important to know which structural parts of your home are covered by the condo/co-op association and which aren’t. You can find this out by reading your association’s bylaws and/or proprietary lease. If you have questions, talk to your association or board as well as to an insurance professional. Some associations insure the individual condo or co-op units as they were originally built, including standard fixtures. In this case, the owner is responsible only for alterations to the original structure of the apartment, like remodeling the kitchen or bathtub. Sometimes this includes not only improvements you make, but also those made by previous owners. In other situations, the condo/co-op association is responsible only for insuring the bare walls, floor, and ceiling. The owner must insure kitchen cabinets, built-in appliances, plumbing, wiring, bathroom fixtures, etc.
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Other coverage options you may be able to get depending on area, association, or board are: Unit assessment. This reimburses you for your share of an assessment charged to all unit owners as a result of a covered loss. For instance, if there were a fire in the lobby, all the unit owners would be charged any costs of repairing the loss. Water backup. This insures your property for damage by the backup of sewers or drains. Water backup may not always be included in a policy. Check to see that it’s included. Umbrella liability. This is an inexpensive way to get more liability protection and broader coverage than is included in a standard condo/co-op policy. Flood or earthquake. If you live in an area prone to these disasters, you will need to purchase separate flood and earthquake policies. Both flood and earthquake insurance can be purchased through your insurance agent. Flood insurance is covered later in this chapter. Floater or endorsement. If you own expensive jewelry, furs, or collectibles, you might consider getting additional coverage, since there is generally a $1,000 to $2,000 limit for theft of jewelry on a standard policy. When you’re buying insurance, it’s important to find an agent or company that specializes in condominiums or co-ops. You can reduce your rates by raising your deductibles and by installing a smoke and fire alarm system that rings at an outside service. Also, don’t forget to check on discounts if you insure your unit with the same company that underwrites your building’s insurance policy. Shop around and get at least three quotes, since costs can vary considerably.
Importance of a Home Inventory In case of loss, would you be able to remember all the possessions you’ve accumulated over the years? Having an up-to-date home inventory will help you get your insurance claim settled faster and verify losses for your income tax return. Rocky and Lisa’s home was completely destroyed a few days after Christmas. A flue from their wood-burning stove developed a crack that allowed hot gases to ignite a wood beam in the ceiling.
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Luckily, they had gotten a video camera for a Christmas present and decided to tape their house and possessions after reading a magazine article about fire safety. The camera was one of the few items they saved, and the video was still in it, along with some precious family footage as well. The tape saved them a lot of problems and thousands of dollars. There’s no way they could have remembered or proved everything they lost in the fire without it.
How to Inventory Start by making a list of your possessions, describing each item and noting where you bought it and its make and model. Add any sales receipts, purchase contracts, and appraisals you have. For clothing, count the items you own by category—pants, coats, and shoes, for example—making notes about those that are especially valuable. For major appliances and electronic equipment, record the serial numbers, which are usually found on the back or bottom. If you’ve just bought a home, work up a list as you are moving in and unpacking. Items you’ll need to list are: Valuable items like jewelry, art work, and collectibles, which may have increased in value since you received them. Check with your agent to make sure that you have adequate insurance for these items. They may need to be insured separately. Take pictures of rooms and important individual items. On the back of the photos, note what is shown and where you bought it or its make. Don’t forget things that are in closets or drawers. Videotaping your home inside and out can save you a lot of money. If you have a claim, the tape will verify and remind you what to list for reimbursement. Update it at least every two years and store a copy of the tape away from the property.
Videotape your home. Walk through your house or apartment, videotaping and describing the contents. Or do the same thing using a tape recorder. Use your PC to make your inventory list. Personal finance software packages often include a homeowner’s room-by-room inventory program. Regardless of how you do a list (written list, computer disk, pho-
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tos, videotape, or audiotape), keep your inventory along with receipts in your safe deposit box or at a friend’s or relative’s home. That way you’ll be sure to have something to give your insurance representative if your home is damaged. When you make a significant purchase, add the information to your inventory while the details are fresh in your mind.
How to Pick an Insurance Company Many homebuyers don’t take the time to shop for the best insurance deal. Their mortgage lender calls and tells them they need to have an insurer fax or send an HO-3 binder so that the deal can close. Letting the lender choose or asking friends or coworkers whom they use is not the best way to find the best insurance deal. Four Things You Need to Look for When Shopping for an Insurance Company 1. Price. Insurance policies and prices vary greatly from one com-
pany to another, so it pays to shop around. Get at least three price quotes from companies, agents, or from the Internet. Check with your state insurance department, it may publish a guide that shows what insurers charge in the various parts of your state. 2. Insurer stability. Make sure that the company you buy from is
financially stable, so that you know they’ll be around to pay any claims. Few things are more devastating to your financial future than to have your home burn down, and then the insurance can’t or won’t handle your claim. 3. Service. The insurance company and its representatives should
answer your questions and handle your claims fairly, efficiently, and quickly. You can get a feel for this by talking to other customers who have used a particular company or agent. Also check with your state insurance department to see if it has a complaint ratio that compares the number of valid complaints with the company’s share of policies in your state. 4. Availability. Whether you buy from a local agent, directly from
the company, by phone, or the Internet, you should be able to contact the company or agent easily. If you can’t, consider get-
138 Insurer stability. The following companies rate insurance company strength: A. M. Best Company, Inc. Ambest Rd. Oldwick, NJ 08858 908-439-2200 www.ambest.com Fitch Ibca Inc. 1 State Street New York, NY 10004 212-687-1507 www.fitchibca.com Moody’s Investor Services 99 Church Street New York, NY 10007 212-553-0300 www.moodys.com Standard & Poor’s Insurance Ratings Services 55 Water Street New York, NY 10004 212-438-2000 www.standardand poor.com Weiss Research 4176 Burns Road Palm Beach Gardens, FL 33410 800-289-9222 www.weissratings.com
A Survival Guide for Buying a Home
ting another company. Fast and easy claim service is one of the basic things you’re paying for.
Narrowing Down Your Choices Some of the factors an insurance company uses to determine the price of your policy are: The square footage of the house and any additional structures Building costs in your area Your home’s construction, materials, and features The amount of crime in your neighborhood The likelihood of damage from natural disasters, such as hurricanes and hail storms The proximity of your home to a fire hydrant (or other source of water) and to a fire station, whether your community has a professional or volunteer fire service, and other factors that can affect the time it takes to put out fires The condition of the plumbing, heating, and electrical system
If you rent your home or own a condo/co-op, your insurer will not consider the size of the dwelling or building costs. However, it will take into account factors that make damage to your possessions more likely, such as living in Tornado Alley or in hurricane prone areas. The price you pay for your homeowner’s insurance can vary by hundreds of dollars, depending on the above data and the company. So
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shop around and get at least three price quotes. You can call companies directly or access information on the Internet. Your state insurance department may also provide comparisons of prices charged by major insurers.
Shopping Tips for Getting the Best Insurance Deal Get quotes from different types of insurance companies. Some sell through their own agencies with the same name as the insurance company. Others sell through independent agents who offer policies from several insurance companies, while others don’t use agents. You can even find insurers who sell directly to consumers over the phone or through the Internet. Consider going with a higher deductible. The deductible is the amount of money you have to pay toward a loss before your insurance kicks in. The higher your deductible, the more money you save on your premium. A deductible of $500 or $1,000 can save you as much as 25 percent. If you live in a disaster-prone area, your insurance policy may have a separate deductible for damage from major disasters. For instance, if you live near the East Coast, you may have a separate windstorm deductible. In a state vulnerable to hail storms, a separate deductible for hail or tornado-prone area will have a deductible for that type of threat. Buy your home and auto policies from the same insurer. Most companies that sell homeowner’s insurance also sell auto and umbrella liability insurance. (An umbrella liability policy will give you extra liability coverage.) Some insurance companies will reduce your premium by 5 to 15 percent if you buy two or more insurance policies from them. But make certain this combined price is lower than buying coverages from different companies. Make your home more disaster resistant. Find out from your insurance agent or company representative what you can do to make your home more resistant to windstorms and other natural disasters. You may be able to save on premiums by adding storm shutters and shatterproof glass, reinforcing your roof, or buying stronger roofing materials. Older homes can be retrofitted to make them better able to withstand earthquakes. In addition, consider modernizing your heating, plumbing, and electrical systems to reduce the risk of fire and water damage.
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Remember, you’re insuring the house, not the land, so you’ll need to subtract the value of the land when you calculate how much homeowner’s insurance to go with. Too many homeowners insure their home for the appraised value, which includes the land as well as the improvements. Insurance agents should point this out, but many times they don’t, because it increases your premiums as well as their profits. Check out discounts for home security devices. You can usually get discounts of at least 5 percent for smoke detectors, burglar alarms, or dead-bolt locks. Some companies may cut your premiums by as much as 15 percent or 20 percent if you install a sprinkler system and a fire or burglar alarm that rings at a monitoring station. These systems aren’t cheap, and not every system qualifies for a discount. Before you buy one do the math. Find out what kind your insurer recommends, how much the device would cost, and how much you’d save on premiums. Ask what other discounts are available. Companies don’t all offer the same discounts or the same amount of discounts in all states. Ask your agent or company representative about discounts available to you. For example, if you’re at least 55 years old and retired, you may qualify for a discount of up to 10 percent. Of if you’ve completely modernized your plumbing or electrical system recently, you may get a price break. Check out group coverage through your employer to see if a homeowner’s policy is available and is a better deal. Also, professional, alumni, and business groups may offer insurance packages at a reduced price. If you’ve been insured with the same company for several years, you may receive a discount for being a long-term policyholder. Some insurers will reduce premiums by 5 percent if you stay with them for three to five years, and by 10 percent if you’re a policyholder for six years or more. Still, rates and policies can and do change, so compare every couple of years to make sure you’re getting the best deal possible. Review policy limits and the value of your possessions annually. You want your policy to cover any major purchases or additions to your home. But you don’t want to spend money for coverage you don’t need. If your five-year-old fur coat is no longer worth the $5,000 you paid for it, you’ll want to reduce or cancel your floater (extra insurance for items whose full value is not covered by standard homeowners’ policies).
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Earthquake Insurance Standard homeowner’s, renter’s, and business insurance policies do not cover damage from earthquakes. However, coverage is available with an endorsement or as a separate policy through most companies. Unlike flood insurance, earthquake coverage is available from private insurance companies—except in California, where homeowners can also get coverage from the California Earthquake Authority (CEA). The deductible for earthquake insurance is most often 2 to 20 percent of the replacement value of the structure, rather than a set amount. Fox example, if it takes $100,000 to rebuild a home with a 2 percent deductible, you would be responsible for the first $2,000. Insurers in states like Washington, Nevada, and Utah, with a higher than average risk of earthquakes, can have minimum deductibles of around 10 percent. Premiums differ widely by location, insurer, and the type of structure. Generally, older buildings cost more to insure than newer ones. Wood frame structures have lower rates than brick buildings because they tend to withstand quake stresses better. The cost of earthquake insurance is calculated on a per $1,000 basis. For instance, a frame house in the Pacific Northwest might cost between one to three dollars per $1,000, while on the East Coast it may cost less than fifty cents per $1,000.
Flood Insurance—Who Needs It? Homeowners’ policies don’t cover flooding. You can only get flood insurance from the federal government’s National Flood Insurance Program (NFIP). It boils down to this: if you don’t have an NFIP policy, you don’t have flood coverage. Even though you may live outside Special Flood Hazard Area (SFHA) FEMA’s National Flood Inboundaries—also called one-in-100 years surance Program: www flood elevation—the low cost of a NFIP .fema.gov/nfip/ policy may still be worthwhile. Storm drains overflow and flood adjacent areas, canals break, and new developments may channel water where it’s never gone before—your basement. In fact, 25 percent of the 595,000 claims the Federal Insurance Administration has paid out since 1978 have been to people outside the flood zones.
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To find out if your home is in a flood zone, contact your local building or planning department and ask to see the flood insurance rate map published by FEMA. If your zone designation begins with an A or V, you’re in a flood plain. And to obtain FHA, VA, or conventional financing, you’ll need proof of flood insurance prior to closing. Also, coverage is not limited to homeowners; tenants can purchase their own flood insurance policies to cover contents. Flood insurance can be purchased in any community that has agreed to adopt flood plain management programs. Currently, about 18,000 of the nation’s 22,000 cities, towns, and counties are members. Average premiums in high-risk areas are about $300 a year. The rate goes up according to the value of the property and its location. But coverage in low and moderate risk areas is as low as $85 a year. Coverage tops out at $250,000, with an additional $100,000 for contents. The policy also covers up to $500 for removing contents to a safe location, up to $750 for sandbagging, pumping, and other preventive costs. Flood insurance policies are sold through local insurance agents. The company that handles your homeowner’s policy can probably add this coverage for you.
Mortgage Life Insurance Many people confuse mortgage life insurance with private mortgage insurance (PMI). Private mortgage insurance pays the mortgage lender in case of default. If you take out a mortgage with less than 20 percent down payment, the lender will require PMI to protect it from default. Although it sounds similar, mortgage insurance that insures you in case of disability or death is optional. Within a few days of closing, you’ll probably get offers and brochures from your mortgage company or an affiliate offering different types of mortgage insurance. Some policies will make the payments if the borrower becomes disabled; others will pay off the mortgage upon the borrower’s death. The question is, are these policies a good way to go? If you would sleep better at night knowing that if you become sick or disabled, your mortgage payment would be paid, then this type of policy may be worth pursuing. Compare quotes from several insurers, including the company that has your homeowner’s policy. Rates will vary widely depending on area, age, and amount. Another option available is the policy that pays off the mortgage if
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you die. Basically, this is called a decreasing term insurance. In theory, the rates should go down as you pay off the mortgage. Many financial experts say that a standard term policy is not only cheaper but Mortgage disability protechas more flexibility. For example, mortgage insurance would pay off the mort- tion: gage balance automatically if you were to www.gemortgage die. A regular term policy would pay the protection.com survivors, but if they didn’t want to pay www.disability-insuranceoff the mortgage, they wouldn’t have to. center.com Here again, the best way is to check with several companies and compare rates. The www.1insurancequotes company that has your homeowner’s pollifedisability icy may have this program and give you a insurance.com cost break. www.inlinea.com/goto/ disability.asp
Title Insurance 101 In many states, the purpose of the title company is three-fold: it sells title insurance, handles escrow funds, and does the actual closing where you go in and sign the paperwork. Other states have attorneys or escrow companies that do the actual closing. But, regardless of who does the closing, title companies still provide the title insurance coverage on your property. Title insurance is one of the biggest yet least understood costs in buying a For more information on home. It’s one of those fees that you don’t title insurance policies and get involved in directly. And, like homerates, go to: owner’s insurance, it can have a big impact when the need suddenly complicates www.stewart.com www.firstam.com your life. Charles and Kristen found this out In Iowa: www.ifahome.com when they thought they had bought a home on a half-acre along a river. What the seller didn’t tell them was that the county had bought an easement along the river for a parkway a few months previously. This reduced the back property line by 40 feet, and somehow the title search had missed the easement. When they were landscaping their backyard, a county parks employee came by to stake out the jogging trail and told them they were
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encroaching on the future parkway. Understandably, the new homeowners were upset and called the title company. Luckily, their insurance was with a good company and they ended up with a fair settlement. At closing, title insurance and related settlement fees will be on the HUD statement in the 1100 section. The biggest fee on the buyer’s side of the statement will be an insurance policy you buy for the mortgage lender. This insures that the property has a good and marketable title. If a lender is going to provide a lot of money on a home, it wants to be protected from any problems associated with a property’s title.
What Title Insurance Covers You pay a one-time fee at closing to insure the property against the following problems: Forgery and impersonation Lack of competency, capacity, or legal authority of a party Deed not joined in by a necessary party (co-owner, heir, spouse, corporate officer, or business partner) Undisclosed (but recorded) prior mortgage or lien Undisclosed (but recorded) easement or use restriction Erroneous or inadequate legal descriptions Lack of a right of access Deed not properly recorded Off-record matters, such as claims for adverse possession or prescriptive easement Deed to land with buildings encroaching on land of another Incorrect survey Silent (off-record) liens (such as mechanic’s or estate tax liens) Pre-existing violations of subdivision laws, zoning ordinances, or CC&Rs Postpolicy forgery Forced removal of improvements due to lack of building permit (subject to deductible)
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Postpolicy construction of improvements by a neighbor onto insured land Location and dimensions of insured land As you can see, these are some heavy-duty problems that can ruin your day if they pop up unexpectedly. For example, Jack and Carolyn bought an older home in a small town, and the tax notice described the property dimensions as 110 feet 140 feet. That had been the accepted dimension for 75 years and six buyers. The new buyers decided to put up a fence, and when they measured 110 feet from the east corner, they found their lot went about 7 feet into their neighbor’s living room—A potentially messy situation. They contacted the title company that insured their sale, and they had a surveyor check out the property corners. As it turned out, the old town survey had a few problems. All the lot lines along the street had to be readjusted on the plat and new property descriptions worked up and recorded in the county recorder’s office. It turned into a severalthousand-dollar project that the title insurance covered.
The Seller Insures the Buyer (Seller’s Policy) Just as you paid the title company to insure the lender against the above title problems, the sellers buy a policy guaranteeing title to you as a buyer. This is normally one of the sellers’ closing costs, and their title policy typically runs about 40 percent more than the lender policy. Title insurance costs vary from state to state. Some states set the rates, others require that insurers file their rates with their state department of insurance, and some don’t regulate the fees. In Iowa, homebuyers typically purchase a title-warranty certificate from the Iowa Finance Authority. You get the same coverage as title insurance at a fraction of the cost. Ask your realtor or mortgage lender what the norm is in your state.
Private Mortgage Insurance (PMI) In addition to homeowner’s insurance and title insurance, private mortgage insurance is the third insurance policy you’re likely to have in a typical closing. Private mortgage insurers are usually separate companies that specialize in insuring mortgages. They’re not connected to a government agency, mortgage company, or investor. PMI is required if you have less than a 20 percent down payment.
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It insures the lenders against your not making your payments and their having to foreclose. The monthly premium is calculated on a sliding scale. A 5 percent down payment will cost more than a 10 percent down and is calculated on the loan amount. For instance, a $150,000 home with 5 percent down payment might have a .70 percent premium or $87.50 per month. A 10 percent down payment could have a .50 percent premium or $62.50 per month. Your monthly rate can also depend on your credit rating as well as the loan amount. The PMI is supposed to drop off when the loan is paid down 20 percent. But recently, with lower interest rates and rising house values, many homeowners simply refinance and show they have at least 20 percent equity, thus avoiding the PMI. On FHA insured loans, however, the PMI doesn’t drop off. So the strategy is to get into the house with an FHA loan and then refinance to a conventional 80–20 loan as soon as possible.
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Tax Aspects of Buying and Owning a Home
One of the big reasons for buying a home is the tax break. Uncle Sam, in effect, subsidizes your mortgage. Couple that with the consistent appreciation of homes, and you have a financial advantage that’s hard to ignore. Another important tax aspect is property taxes. You pay them indirectly when you rent because the landlord includes them in the rent. If your landlord’s building is reassessed and the taxes increase, your rent will go up either next month or at the next lease renewal. In this sense, landlords don’t pay taxes, the tenants do. Anytime taxes or other costs go up, the landlord has no other choice but to pass these costs on. Unfortunately, there is no escape from the tax man. But, at least when you own your home, taxes become an additional deduction. Still, you want to keep them as low as possible, and how to do that is part of this chapter. Other important tax considerations, such as having a home office, what improvements you can deduct, and the tax advantages of turning your home into a rental are covered in this chapter.
How Tax Deductions Work In most cases, homeowners are able to deduct the amount of mortgage interest paid in the tax year as well as property taxes. When you sell the house, you don’t have to pay capital gains tax on the first $250,000
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for a single person or $500,000 for a married couple. Obviously, the financial deck is stacked in favor of home ownership. Ron and Laura took advantage of this exemption when they both retired and sold the home they had lived in for 23 years. Their $62,000 home had appreciated to $219,000, and when they sold, everything was tax-free. They bought a motor home with half of the proceeds and banked the rest. After closing on their home, they drove out of the title company’s parking lot in their new motor home and off into the sunset. If they had been renters, there would have been no motor home, no $100,000 bank deposit, and no driving off into the sunset.
Renting vs. Buying Tax Comparison To get an idea of exactly how much you would save buying a home versus renting, let’s assume that a renter and homeowner both make $60,000 a year. The renter pays $1,000 per month rent and gets no tax breaks. The homeowner has a $140,000 mortgage at 7 percent, with a $1,100 per month payment. Real estate taxes are $1,500, and mortgage interest paid for the year totals $9,756. To keep it simple, assume that both renter and homeowner are in the 25 percent tax bracket. The renter will owe .25 $60,000 or $15,000 in taxes to Uncle Sam. The homeowner will be able to deduct the $9,756 interest plus the $1,500 in property taxes paid, or $11,256. Subtracting that from the $60,000 income leaves $48,744. Multiplying that by the .25 percent tax bracket leaves a tax bill of $12,186. Dividing that by 12 months translates into a savings of $235 a month. The homeowner’s after-tax monthly house payment ends up at $865. And after 360 payments, the homeowner gets to keep the house, which should appreciate significantly. The renter will have a stack of rent receipts and the uncertainty of rents going up whenever the economic winds shift. Your tax situation may vary, but a useful rule-of-thumb is that you’ll save about 20 percent of your monthly mortgage payment in taxes. Talk to a tax professional to see exactly what you’ll save and what mortgage payment option will work best for you.
Tax Advantages of Working at Home Thanks to broadband technology and laptop computers that rival desktops, more people can work at home and leave the commuting to
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the rest of the world. To make this a more viable working option, Congress passed the Taxpayer Relief Act of 1997, which contained a modification of the IRS definition of principal place of business. Beginning in 1999, the new rules allow those who don’t have offsite office space to deduct the expenses of a home office. Contractors, sales reps, consultants, and others who perform their services outside their office but need a home office can benefit. However, you must use the office exclusively and regularly for business. In addition, if you use part of your home for business such as paperwork, store records, inventory, or samples, you may be entitled to a deduction. You can also convert or build a separate structure that’s not attached to your house. Detached garages, carriage houses, sheds, small barns, etc. make great home office conversions.
What You Can Deduct Depending on the percentage of your home you use for business, you should be able to deduct portions of utility bills, mortgage interest, repairs, depreciation, cost of a second phone line, office equipment, and any For more information on other related expenses. You may also be able to depreciate computers, equipment, home office deductions, and office furniture. However, it’s impor- you can download the PDF tant to set aside the area you use for busi- file, IRS publication 587: ness. You can’t put a filing cabinet in the Business Use of Your Home, family room that’s used for watching TV on www.irs.gov/pub/irsand call it an office. The area must be used pdf/p587.pdf for business only. Other interesting Web If you decide to claim a home-office deduction, you should keep meticulous sites are: records of all your expenses and be pre- www.taxnetusa.com/ pared to back them up if you’re asked to www.ntu.org/ by the IRS. publications_store/
Look Before You Leap There’s also a downside to creating a home office. Eventually, you’ll probably move, and if you have spent $20,000 to create a great home office, chances are you won’t be able to add that to the price of the home. It may even lower the value. Before you draw up plans and get bids for that dream home office you saw in a magazine article, do some ‘‘what if’’ thinking. If you’re
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planning on moving in a few years, will the home office add to the sales appeal? If you turned a bedroom into an office, can it be restored back without too much trouble or expense? Look at other homes that have sold in your area. What will be the biggest sales attraction, a bedroom or an office?
Turning Extra Space Into Tax Breaks and Income When Sharee divorced, she ended up with the house and a $1,900 mortgage payment. There wasn’t a lot of equity, so selling was not an option, nor was letting the home go into foreclosure and ruining her credit. The home had a finished basement with an outside entrance, two bedrooms, a family room, full bath, and a wet bar. Sharee figured she could easily covert the wet bar into a kitchenette and rent the basement for $800 a month. The practice of renting extra space in the attic or basement has spread to more affluent urban areas as well as suburban neighborhoods. Empty nesters, one-income families, widows, and widowers are taking in tenants to help pay their mortgages. Others are adding basement or attic apartments when they build a new home. If you’re anticipating caring for parents or kids who may come home the second time around, consider adding a finished apartment. If that’s not feasible, at least add the electrical and plumbing rough-in. This is a lot cheaper than retrofitting later on.
First, Check Out the Zoning Your first move should be a call to the town zoning department. In most subdivisions, zoning laws limit houses to single-family occupancy. That doesn’t mean you can’t take in a boarder or two, although that may violate local ordinances. If the tenant is a relative, you shouldn’t have a problem with adding an in-law apartment. Most zoning departments, insurers, and mortgage lenders will go along with that kind of addition. But if you want to create an apartment and rent to a nonrelative, check the zoning first. If that is prohibited, you may be able to get a conditional use permit or variance. This entails going to the zoning department and filling out the paperwork. There may be restrictions on how utilities are set up as well as inspections for building code
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compliance. A hearing may also be required to give the neighbors a chance to protest. True, this is a more expensive and time-consuming way to go, but in the end it’ll be worth it. Some homeowners ignore zoning rules because the city or county is lax in enforcement, and they know they can get away with it. They possibly can for a while, but it usually comes back to haunt them. Administrations change, and all properties are eventually put up for sale. If they sell or refinance, a mortgage lender may want to see the permits. Or the insurance company may deny a claim if you’ve violated the policy terms and your home is now a pile of ashes. Also, if you’re buying a home with an apartment, garage, remodeling, or addition, you’ll want to verify that building permits exist and the house is zoning compliant. Otherwise, you can end up with fines and expensive upgrades. You can also get extended title insurance coverage at closing that insures the previous owners have complied with all zoning and building permits. Brandon and Julie had this problem when they made an offer on a home with a basement apartment in a great neighborhood near a university. The apartment had been rented out for years, and several other homes on the street also had basement apartments. No one questioned whether it was zoned for a rental. However, when the appraiser checked the zoning, she found it was zoned for single-family homes and adjusted her appraisal down. Although the city zoning department said it hadn’t and wouldn’t enforce the zoning in this case, it still wouldn’t approve the house and apartment for duplex zoning. This created a sticky situation. As a single-family house, its appraisal came back $12,000 under sales price. The sellers were upset because now the genie was out of the bottle and the home couldn’t be sold as a duplex, lowering the value considerably. And no mortgage lender would finance an illegal duplex. The buyers, rather than walking away from the deal, offered to buy at the reduced price, and reluctantly the sellers accepted. The bottom line is that before you buy a house with an apartment, check the zoning and verify any required permits. It can save you costly tax, insurance, and zoning headaches later on.
The Tax Angles Uncle Sam allows homeowners to prorate the following costs of being a landlord:
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Utilities Homeowner’s insurance, along with related riders and policies Depreciation Property taxes Property maintenance like exterior and interior painting and landscaping costs The deduction depends on what percentage of your house you rent out. For example, if your home has a full basement that’s rented out, you’ll be able to deduct half of your expenses. Or if you have a 2,900 square-foot home and rent out 800 square feet, your deduction will be 28 percent.
The Capital Gains Factor When you sell your home, you don’t have to pay capital gains tax on the first $250,000 for a single homeowner and $500,000 for a married couple. But if you rent out the full basement, you may be able to claim only one-half the deduction because the other half is a commercial property. However, you can get around this problem by converting the apartment back into a single-family home before you sell. To qualify for the full exemption, owners must occupy 100 percent of the house for two of the five years before the sale. However, this doesn’t necessarily apply to an apartment that a family member lives in. In other words, if you have an apartment and are intending to sell, you’ll need to look ahead and do some planning. Before you rent out your home, check with a tax professional to make sure it’s in your best interests.
Property Taxes and Your Monthly Payment When you buy a home, your mortgage lender will usually require an escrow for taxes and insurance if you have less than a 20 percent down payment. For lower loan-to-value loans, many lenders give you the option of paying property taxes on your own. When tax payments become part of the house payment, the tendency is to mail a check the first of the month and forget about it. As result, it becomes an out-of-sight-out-of-mind situation. But, if you pay property taxes on your own, you develop a slightly different per-
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spective. You feel the pain of writing a sizable check on or before November 30 every year, and when the assessment goes up, the motivation is strong to challenge it. And you should; according to the International Association of Assessing Officers (IAAO), more than half of the homeowners who protest their assessments get a reduction.
Tax Escrow Account When you’re sitting at the closing table going over the closing statement (HUDs), whoever is doing the closing will point out a line labeled county taxes (usually line 211). It will have two dates; the first date will be January first and the second the day you’re closing. There will also be a dollar amount, and that’s the property taxes on the home you’re buying for that year. Since you’re closing somewhere between January 1 and December 31, the property taxes will need to be prorated. Incidentally, property taxes are typically due by November 30, but the tax year is calculated from January 1 to December 31. Back to the closing and line 211. For example, suppose you’re closing on March 27 and the property taxes for the year are $1,364. From January 1 to March 27 are 86 days the sellers have owned the property, and they owe the taxes for those days. So dividing $1,364 by a 365-day year equals $3.74 a day times the 86 days, which yields $321.38; that is the sellers’ portion of the property tax. Since the taxes won’t be due until November when you or the bank escrow pays the full $1,364, the people doing the HUD statements give you a credit for the sellers’ portion or $321.38. But there’s still more if you’re going to be paying your taxes through an escrow. To get the escrow set up, the lender will usually charge you three to five months of tax payments on line 1004. In the example above, the monthly tax payment is $1,364 divided by 12 months or $113.67. If the lender requires five months in the escrow at closing, you’ll be charged five times $113.67 or $568.35 on line 1004. Then each month you’ll pay $113.67 or whatever it takes, so you’ll have enough in the escrow by November.
Property Taxes 101 Understanding how property taxes work is fairly straightforward. There are four simplified steps the county goes through to arrive at the amount it bills you for.
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First, the assessor’s office determines the value of all the properties in the county. It does this by appraisals, sold records, computer modeling, building permits, etc.; the assessor then adds up all the real estate values in Assessor’s job: The assesthe county to get a grand total. Second, if your county uses the full sor’s office keeps track of value approach, the assessor simply totals ownership changes, mainup the appraised values. But, if the county tains maps of parcel bounduses an assessment ratio, say one-half, for aries, and keeps example, then you multiply the total value descriptions of building and of all taxable properties by .50. Third, the county comes up with a tax property features up to rate. This is simply the budget or the date. It also analyzes trends money the county needs for the coming in sales prices, construction year divided by total value of all the real costs, and rents to keep estate in the county. Suppose the tax rate is .0076 and your house is assessed at property values current $200,000. Multiplying $200,000 by .0076 with the market. equals $1,520 that you owe the tax collector. In the final step, the county clerk mails out tax notices to the owners of all Why have a property tax? of the properties in the county. The property tax is part of If you think your taxes are too high, there are two variables you can work with a well-balanced revenue to lower them. One, you can go to the system. It’s a more stable county or city budget hearings and chalsource of money than sales lenge how the government spends the and income taxes because it money. If enough people get upset, a refdoesn’t fluctuate when erendum can put a tax cap on the ballot, as happened in California, Texas, and communities have recesother states. sions. When the community The other way is make sure your spends tax dollars on better home’s assessment is as low as possible. If schools, parks, and so on, the tax notice shows a value you think is too high, you can appeal it. property values rise. Some of the windfall benefits you receive are recaptured by the property tax.
If You Think Your Tax Bill Is Too High, Appeal It Suppose your tax notice values your house at $200,000. You feel that this is
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high because you had an appraisal when you refinanced two months ago for $185,000. Then you happen to talk with your neighbor, whose home is a bit larger and has a bigger yard, and his tax is $200 less than yours. You wonder how can that be. Easy, according to Consumer Reports, tax records show an error rate of 40 per- When market value cent in estimating property taxes. Also, changes, so does assessed the National Taxpayers Union writes that value. For instance, if you as many as 60 percent of all homeowners were to add a garage or are overassessed on their home’s value. If make an addition to your this is the case, then most likely you’re paying more property tax than you home, the assessed value should. Unfortunately, to correct this and would increase. Likewise, if put some dollars back in your pocket, you a property is neglected or in have to be proactive and prove to the poor repair, the assessed county that it owes you money. value could go down.
What Are the Grounds for an Appeal? First, an assessment appeal is not a complaint about higher taxes. It’s an attempt to prove that your property’s estimated market value is either inaccurate or unfair. For a successful appeal, you’ll need to prove at least one of three things: 1. Items that affect value are incor-
rect on your property record. For instance, you have one bath, not two. You have a carport, not a garage. Your home has 1,600, not 2,000 square feet, and so on. This is an easy one; you just compare the assessor’s record to what you’ve really got and submit proof such as a recent appraisal or photos.
The assessor does not create home values; the local real estate market does. If it’s a seller’s market, prices go up and the higher sales prices become public record. Appraisers, as well the tax assessor, use these new comparable sales to establish value. The end result is that your assessed value goes up, along with the real estate market. Hopefully, not as fast.
2. You have evidence (comparables) that similar properties have
sold for less than the market value of your property. 3. The estimated market value of your property is accurate but
inequitable because it is higher than the estimated value of sim-
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FIGURE 8-1 Typical steps to appeal your property taxes. Steps
What you need to do
If the valuation notice values your property more than similar homes in your area.
Have a realtor look up what similar properties have sold for in your neighborhood in the last year. If these sales are less than your valuation, press on.
Prepare your evidence.
Put together a portfolio of similar properties that have sold or appraised for less than your home’s valuation. Your comparisons must be accurate in terms of age, square footage, and amenities.
Set up a meeting.
The valuation or tax notice will outline what steps you should take and whom you should call to set up a meeting.
What to do at the meeting.
This is an informal review of the data you have collected. Make sure it’s as accurate and complete as possible. Be calm and professional. The clerk is not your enemy.
If you don’t get a reduction but still feel you should.
The next step up the ladder is usually an opportunity to present your case to an appeal board.
Set up an appointment with the appeal board.
Present your case as you did before in a calm, professional way. If you can demonstrate that your property is overvaluated, ask the board to reduce it to what is fair.
ilar properties. If your home is in a subdivision of similar homes and your neighbors’ taxes are less, then you have a case for appeal. A title company, county recorder, or realtor can give you a list of what other homes in your neighborhood are paying in property taxes.
How to Appeal Your Assessed Value When you receive your assessment notice, read it for instructions about deadlines and filing procedures. They vary from state to state. If
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they’re not clear, call the assessor’s office for information. A missed deadline or incorrect filing can cause an appeal to be dismissed. The first step in an appeal is usually an informal meeting with someone in the assessor’s office. (Sometimes, this informal review is handled by telephone or mail.) Information on the mechanics and deadlines for setting up an appointment should be included with your assessment notice, along with additional information for the entire appeals process.
Preparing for the Appeal Find your property identification number on your assessment notice and use this number to get a copy of your property record from the assessor’s office or title company. Next, review the facts on the property record. Is the architectural style correctly stated? If not, a recent photo of your home will help correct the information. Check the living area of your home, lot size, number of bathrooms and bedrooms, garage or finished basement, construction materials, condition, and so on. Gather as much information as you can on similar properties in your neighborhood. Ask the assessor’s office, call the friendly realtor who sold you the house, or someone you know who has access to the MLS. They can print out a list of comparable sold homes in minutes that you can use for ammunition in your appeal. Compare your home with the assessed values of similar properties and put together a simple chart comparing the homes feature for feature. Some MLS (Multiple Listing Service) databases can organize the data from comparable homes into columns and make it easier for you. The key is to know what you’re talking about and have the proof to back it up.
Next Step, the Meeting Follow the instructions on your tax notice and make an appointment with the tax assessor. The purpose of this informal review—which is not yet an appeal—is to verify the information on your property record form and make sure you understand how your value was estimated. Also, the meeting is to discover if the value is fair compared with the values of similar properties in your neighborhood and to find out if you qualify for any exemptions. The person conducting the meeting will probably review your property record form with you, along with information you have about
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comparable properties. At this time you can present the information you’ve gathered. You may not get a commitment for a change in value at this meeting, even though you have uncovered an error or the assessment appears to be inequitable. The decision to change a valuation may have to be made by someone else in writing. If so, find out when you can expect a decision. It’s possible that this is as far as you’ll have to go if you get a favorable ruling. If you don’t, then you’ll have to proceed to the next step, which is a formal appeal. In the meeting, view the person you’re talking to as an ally, not an adversary. If you’re calm, polite, and professional, that person will likely be more helpful and can concentrate on giving you the information you need for an appeal, if it comes to that.
The Formal Appeal Residential appeals are often settled at the local level. If you are not satisfied with the results of your informal review, you have several more opportunities. The first level of formal appeal is usually to a local board. Here you’ll need to again present your evidence and point out the similarity between your property and the comparable ones on your list. Include a recent appraisal of your property if you have one. Close by asking the board to reduce your assessment to what you think is fair, based on your data. Remember, keep it focused and professional. The appeal board is interested only in the fairness and accuracy of your assessment. Don’t go off on tangents about how your aging mother needs a lifesaving operation or why you think property taxes are too high. If you disagree with the local board’s decision, additional administrative or legal remedies are available, which vary from state to state. Information about these is available from your assessor’s office.
Beware of Tax Scams Around tax time, you’ll probably get letters offering to reduce your taxes for a percentage of the reduction. Many legitimate companies offer this service. Typically, they’ll charge 30–50 percent of the savings. If you don’t have time to protest your tax bill yourself, this can be a better way than not at all. As usual, talk to three companies and get bids and references. However, beware of scammers who charge a fee up front and
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promise to lower your taxes or get you a rebate. No one can predict if and what you can save without going through the system. Always be suspicious is there’s an up-front fee involved.
Buying a Home Using Your 401(k) or IRA One of the most difficult steps toward buying that first home is coming up with a down payment. Yet many people already have a down payment sitting in their 401(k)s and IRAs that they can tap without triggering stiff tax consequences. One of the most flexible options allows a couple to jointly borrow up to 50 percent or $100,000, whichever is less, of their individual 401(k). They can do this tax and penalty free, as long as the money is paid back. You can use the loan for home buying, home improvement, or just about anything. If you use the money to buy a primary residence, the payback can be extended from 5 years to 10 years. You can also tap your IRA for up to $10,000 without penalty to help family members buy their first home, providing it’s your first time using the homebuyer exclusion. Eric and Amanda tapped their IRA when they helped their daughter buy her first home. Eric, a self-employed contractor and Amanda, a legal secretary, had a sizable IRA they could borrow from. When some past clients offered Eric a great deal on a home that was part of an estate sale, he was able to move quickly by borrowing against their IRA. In addition, not having to tap into his business credit lines or qualify for a home equity loan was a big convenience. However, before you borrow from your IRA account, check with a tax professional to make sure you qualify for these exclusions.
1031 Tax Deferred Exchange For a first-time homebuyer, a section on tax deferred exchanges may appear to be a little far out. But, this underutilized financial tool can make a big difference in the following situations: (1) You want to keep your starter home for a rental when you move up. (2) You’ve rented part of your home and it’s subject to capital gains. (3) You want to trade your single family up to a duplex or fourplex. (4) Someone has an investment property (single-family rental, duplex, or even new construction) you would like, but if this person sold, capital gains would kick in. The possibilities are endless for creating win-win deals and deferring capital gains to a time when the tax bite is not so painful.
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FIGURE 8-2 Typical steps to a 1031 tax deferred exchange. Steps
What’s involved
List the property for sale and line up a property exchange intermediary. The intermediary can be a title company or attorney who is experienced in exchanges.
Include a notice in the listing and sales documents that the property is part of a 1031 exchange. As a seller, you will assign the role of grantee or transferee of the deed to the intermediary.
A buyer for the property is found.
The intermediary prepares an assignment, giving the role of seller to the intermediary, along with the other exchange paperwork that goes to the closing agent.
The sale is closed, and equity funds are put in escrow.
Exchanger and buyer sign an assignment agreement, which assigns the intermediary the role of seller in the sale. The 45-day clock starts ticking on identifying an exchange property.
The hunt for a replacement property should be well on its way by this time.
There are 45 days to find property and identify in writing by street address or legal description. This is faxed to the intermediary.
The exchanger makes an offer on the property.
Included in the purchase agreement is a notice that the deal is part of a 1031 exchange with the required assignments. This is usually not a problem with the sellers; they just want to get their money and be on their way.
If there are multiple properties and multiple exchangers.
All the parts of the exchange are put into escrow and closed with each party getting its designated property at the about the same time. Closing and funding have to be within the 180 days.
File tax forms.
Exchangers file Form 8824 with the IRS and any other state-required forms.
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Unfortunately, paying capital gains taxes keeps many owners from selling single-family homes and condos they’ve owned for years and would like to unload. These properties may be homes they couldn’t sell in a slow market, so they rented them. Eventually, the market changes, and suddenly the rental has lots of equity and a growing tax liability. Not wanting to go through the pain of fixing up the property and putting it on the market, many owners continue living with the problem and delaying doing something proactive. As equity grows, the problem also grows for many owners. Luckily, a 1031 exchange may be able to solve their problem by getting them into something more suited to their interests. Putting an exchange together is fairly straightforward but may require the expertise of an exchange intermediary, accountant, and a title/escrow company depending on the number of properties and complexity. The exchange intermediary is the neutral party that handles the nuts and bolts of the exchange. To find one, look in the yellow pages or check the Internet under Real Estate Exchange. Or better still, realtors and title companies who do 1031 exchanges will be able to recommend good intermediaries. You’ll also need a title or escrow company to handle title work and funding, and, of course, the buyers and sellers for the properties in the exchange. The exciting thing about 1031 exchanges is that you don’t have to have two property owners who want to exchange straight across; you can bring in other buyers and sellers with their properties to add to the mix. Here’s a simplified example: you find a buyer for the property you want to get rid of (relinquished property), and the sale goes into escrow. You have 45 days to find a property you want to buy (replacement property), and that goes into the escrow. The buy/sell mix closes, and you end up with the property you want. The party with the least equity can use cash or financing to make up the difference.
How One Couple Profited from an Exchange When Norm and Sandy were transferred from Utah to Georgia, the market was slow. They couldn’t sell the home they were living in, nor a smaller rental home they bought from an estate. So, they hired a rental company to manage the homes, and both rented for close to their mortgage payments.
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Three years later, interest rates had dropped, and the market had improved, so Norm and Sandy decided to sell the homes. Their strategy was to put the proceeds from the sales into a 1031 exchange escrow with a title company in Utah and find a rental property in Georgia. When they closed on the property where they lived, the funds would be released from escrow and used for a down payment. The balance of the purchase price would come from a nonowner occupied mortgage. Luckily, the tenants in the smaller home wanted to buy it and were able to qualify for the mortgage payments, which were $80 less than their rent payment. The sale closed, and the $37,000 proceeds went into the title company exchange department’s escrow account. While the paperwork for the rental sale was going forward, Norm and Sandy were out looking for rentals in their area. The market was tight, and they didn’t find anything they liked until two weeks after their home in Utah had closed. (The IRS allows 45 days to identify a property and up to 180 days to close the deal). They made an offer on a two-bedroom condo in a good area for $185,000, and it was accepted. The $37,000 in escrow was used for a 20 percent down payment and the balance financed with a nonowner-occupied mortgage. The equity from one rental home in Utah was transferred to Georgia with no capital gains taxes. Norm and Sandy’s other rental has six months to go on a lease. If the tenants can’t or don’t want to buy it, the property will go on the market and the process will be repeated. As you can see, the 1031 exchange is a great way to transfer equity from one area to another without losing to capital gains taxes. If you need to move and can’t sell your home, you can rent it until the market improves and still build equity.
Essential Information The IRS requires the exchange to be in kind, and it identifies that as real estate for real estate. You can exchange a duplex for bare land, office building, warehouse, or whatever, just so long as it’s real estate. You can exchange one property for ten properties; the numbers on either side of the exchange don’t matter, just so long as the properties are not used as primary or secondary residences. From the date of closing on the sale of the relinquished property, you have 45 days to find the replacement property(ies), and 180 days to close. You must insert a clause into all sale contracts that identify the
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transactions as a 1031 exchange. The IRS needs to see an easy-to-follow paper trail. John and Angie went the exchange route when they decided they no longer wanted the demands of being a landlord. They owned a duplex that had about $80,000 equity and didn’t want to pay out a big part of their equity in taxes. Although they didn’t want to exchange it for more rental property, undeveloped land appeared to be a good way to go—low maintenance, no rent to collect, or late-night plumbing problems to fix. Finding a buyer for their duplex was easy, and the sale closed with the proceeds going into escrow. Their realtor found a 10-acre parcel for sale that appeared to be in the path of eventual development. Since the land cost $139,000, John and Angie needed about $59,000 to make a deal. They decided to take out a 10-year, low interest equity line of credit on their home for the funds needed to complete the deal. The second leg of the 1031 exchange closed, and everyone was happy. As a result of the exchange, a young couple starting out was able to buy a duplex they had been searching for. John and Angie didn’t have to collect rents or do maintenance on their day off anymore. Everyone won, and the tax man had to wait for another day to collect his due. For more information on 1031 exchanges go to www.firstamex.com.
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Selling Your Home and Moving Eventually, every home ends up with a for sale sign in the front yard. Sometimes it’s a planned sale and the owners anticipate making money and moving up. Other times it’s an estate sale and the heirs want to put the sale behind them as quickly as possible. Unforeseen life changes also require homes to go on the market. The homes-for-sale pot is constantly being stirred with homes coming on and going off the market. Unfortunately, too many homeowners lose money needlessly when they sell. Many times that’s because they don’t have an exit strategy when they buy. Buying a house is not a forever project. Nationally, the average family moves about every six years. As a result of our mobility, no book on homebuying can be complete without a section on selling. The two are often intertwined when sellers close on one home then, without leaving the conference room, close on another as buyers. So, a section on how to sell a home and get the most money becomes a must read. Since everyone who buys and sells a home must move, tips on how to find and work with a mover are included that can easily save you big bucks. To add a little frosting, a section on successful garage sales should bring in some money to help defray the moving costs.
Shaping Up Your Home to Sell for the Most Money When most people sell their car, they clean it meticulously inside, outside, and under the hood or send it to a detail shop. They know intu-
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itively that you can’t sell a car that doesn’t look sharp. There’s lots of competition out there, and buyers are discriminating. Yet, it’s amazing how many people put their home on the market with nowhere near the thought and planning they would put into selling their 1998 Honda Accord. It’s as if they decided to sell, so they ran down to the home center, bought a sign, and stuck in the lawn—end of process. You can do that, and your home might sell, but it’ll cost you a few thousand dollars. Here’s a better way that will give you a bigger smile when you deposit your closing check.
Curb Appeal Brings Better Offers We’ve all heard that first impressions are most important, and so it is with your house. What kind of first impression will your house give buyers who drive slowly by your home? Real estate people call this curb appeal. If you have great curb appeal, the sale is half done. If you don’t, the buyers are looking around wondering what else is not up to par. And in their mind, the value takes an escalator ride down. So walk across the street from your home and pretend you’re a buyer. What do you see that detracts from good curb appeal? Take notes and/or photos. Also, look at other homes in your area that you find attractive. Note what the owners have done and do likewise. Remember, good curb appeal will put money in your bank account.
Five Ways to Create Great Curb Appeal 1. Start with the overall picture. How’s the lawn? Does it need
fertilizer and water to make it green and inviting? Planting flowers is also a great way to add color and appeal. 2. Can you see your house? Trees should frame the house, not block its view. If possible, clear out trees and shrubs that block the front view and detract from it. Of course, if you have 100-year-old sycamores, cutting them down may not be a good idea. Older trees lining the streets make some neighborhoods appealing. Foundation shrubs should be trimmed down to no more than 3–4 feet high. A big no-no is letting shrubs grow so tall that they block front windows. 3. Follow the steps a buyer would take to your front door. How are the walkway, the porch, or steps and any railings? This is critical— the buyer’s mind is recording all this with DVD clarity.
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4. The entryway is another important impression-making item. Make sure your front door is freshly painted or stained and the fixtures free of tarnish. If the front door has seen better days, replace it with a model that complements your house style. Oh, and don’t forget the porch light fixture. 5. The roof is an important part of your curb appeal. If your roof
is 10 years plus, it’s a good idea to get a roofing inspector to look at it. Get the inspection in writing with the inspector’s contractor’s license number clearly legible. Having this inspection will show potential buyers the roof’s condition when they ask. If the roof is getting old and shingles are missing and/or curled, consider springing for a reshingle. It’s going to cost you a lot more when all you get is low offers because buyers get a fixer-upper image of your home.
Making the Inside Attractive When buyers are impressed with your home’s curb appeal, they’ll walk through your front door with a growing feeling of ‘‘I could enjoy living here.’’ The next thing buyers take in is the paint job. Bright yellow walls with a salmon accent may look good in the House Beautiful magazine, but this won’t sell your home. Giving your home a fresh coat of offwhite low luster paint will keep the ball rolling. No one can fault you for going white. Even wannabe decorators will look at a white wall with anticipation. Sellers on one home painted all the rooms in the house a different bright color. The effect was bizarre, but they refused to repaint the home. They felt that a buyer with their tastes would come along and buy it. Unfortunately, such a buyer didn’t come along. After the house sat vacant for months on the market, with the owners making mortgage payments, they did get an offer. The sellers ended up selling for what they owed, losing not only equity but also about $7,000 in mortgage payments while the house was empty. By the way, when you take down the pictures, knick-knacks, and three generations of family photos to paint, leave them down and box them up. You’re going to move anyway, and you don’t want to distract the buyers from imagining their stuff on the clean white walls. Actually, anything that prevents buyers from imagining themselves owning the house should go into storage. Most common objects are trophies, hobby display cases, awards, and antiques.
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The Kitchen Is Next in Importance Every year Remodeling magazine publishes a ‘‘Cost vs. Value Report’’ that looks at the cost of different remodeling projects and what return you could expect if you were to sell. Obviously, the return varies widely with the area, but the kitchen is the most important project according to the report’s data. You don’t have to spend a fortune to make your kitchen look good; here are five suggestions on how to do that: 1. If your floor is old and the vinyl is cracked, you’ll need to replace it. A mid-grade vinyl is a good way to go make your kitchen look new. Don’t try to give a flooring allowance so that the buyer can take care of it; that can cost you a sale. It’s easier for a buyer to simply go to the next home on the list than worry about installing a new floor. 2. Kitchen cabinets that are dated or look beat up can be brought
back to life economically with a new facelift. There are companies that specialize in kitchen cabinet refacing that are worth looking into. Check the Yellow Pages under Kitchen Cabinets. As usual in working with contractors, get three bids. Another option is to remove as much finish as possible with a chemical remover, then sand the cabinets smooth with 220 or finer sandpaper. Using a good-quality gloss white enamel, apply as many coats as needed for a high gloss look. 3. If the countertops are dated or in bad condition, replace them with a new laminate countertop or whatever homes in your price range have most commonly. In other words, if homes in your price range have Corian or granite, you don’t want to put in anything less. 4. Appliances should all be in working order. Here again, if they’re
dated, you’ll need to replace the range and/or dishwasher. It’s important to have the appliance colors match. If an appliance is in good condition but in a different color, you can have it painted for a fraction of what it costs to replace it. Look in the Yellow Pages under Appliances—Refinishing. 5. Lighting can make or break an otherwise great kitchen. If needed, upgrade or add lighting fixtures. The small halogen undercabinet lights can give a drab kitchen a designer look. Check out the options at a home center; there are enough choices to whet any designer appetite.
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Bathrooms Are Important, Too Bathrooms on the ‘‘Cost vs. Value Report’’ came in second as the most important remodeling project. If your bathroom is 15 plus years old, you may have to replace some fixtures. If those are still in good condition, then painting, recaulking, and cleaning the grout and tile may be all that’s needed. If it’s a small bathroom and the sink/cabinet is old, consider replacing with a pedestal sink. It will make the bathroom look bigger and less cluttered. Also, look at the lighting, which can also transform a bathroom’s look. Getting your home in shape to sell does take a lot of effort and some cost. But you really don’t have a choice if you want to get the most money. Sellers who dump a home on the market are likely to lose thousands of dollars more than the money they would have spent getting it in top showing condition.
Positioning Your Home to Get the Most Money Buyers will navigate three homebuying rapids before they see your home. The first is location. The better the location, the more buyers will be attracted to look in that area. Second is price. The more homebuyers in the market who can afford your home, the better. Third, the more mainstream your home is in size, style, and floor plan the bigger pool of buyers you’ll have to market to. Maybe that’s why vanilla is the biggest selling ice cream flavor. A great book on this is Martha Webb’s Dress Your House for Success (ISBN 0-517-88844-0). It’s a must read on presenting your house at its best.
What Factors You Can Control Actually, the single best thing you can do to sell your home for the most money is when you buy it. At that time you lock in location, home style, and amenities. If you’ve chosen well, taken good care of your home, and tastefully decorated it, then you’ll get top dollar for your area. When you look at the stark reality of homebuying, you’ll find that buying a bargain house in a not-so-good area can end up biting you when you sell. Homes buy and sell every day, regardless of a buyer’s or seller’s market. The best maintained homes in good areas always sell quickly for top dollar. You might compare home sales to a pyramid. In a hot
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seller’s market, the top 30 percent go quickly. As you go down the pyramid, the other 70 percent sells, but time on the market grows the further down you go. If the seller’s market persists, even properties on the bottom sell because there’s nothing else to buy. The San Francisco real estate market is a classic example. The top 10 percent of the pyramid is almost immune to the buyerseller market cycle. These are the homes buyers look at and exclaim, ‘‘This is it!’’ Emotions take over and price becomes secondary. Not all are high-end homes; they’re found in all price ranges. But, they’re the best within their price range, and that’s where you want to position your home. For example, a home was put up for sale during a buyer’s market when homes were averaging 70 days on the market. It was a 40-yearold frame cottage, but it had been upgraded and was priced in the beginning homebuyer range. The owners had decorated the home in coordinating colors that tied all the rooms together. The house’s exterior and detached double garage had matching vinyl siding. A new roof, along with a meticulously maintained yard, gave the home great curb appeal. The home was priced about $8,000 over comparable homes that had sold recently. But, from the moment the sign went up, calls poured in followed by a full price offer a few days later. The buyers didn’t question the price; they felt lucky to have found their dream home in an area they wanted. So what set this home apart from the competition? Obviously, it wasn’t price, although, many sign callers were looking in a price range of $15,000–$20,000 less. This is normal, because hope springs eternal in the minds of bargain hunters. They have to find out—they have to call. The offers you get and the price you end up going with are dependant on the type of buyers you attract. If you attract mainly investors and bargain hunters, it’s going to be painful. If you attract serious homebuyers who are looking for their dream home and buy on emotion, you’re going to get good offers. What set this home apart was, first, the area. It sits on a deadend street of well-maintained homes. Second, the decorating was well thought out. Kitchen cabinets were refinished, and walls were freshly painted with wallpaper trim and molding that matched the cabinets. New vinyl floors and countertops in coordinating colors made the kitchen an inviting place to be.
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How to Determine Asking Price One of the biggest mistakes is putting your home on the market before you’ve got the home in top shape to sell. Homes new on the market attract those buyers who are serious, qualified, and looking for a home. If you put your home up before it’s ready, this pool of buyers will look at your home and move on to other homes to buy. You’ve lost the momentum that’s important for a fast sale. If fact, those other sellers should send you a thank-you card. You’re helping sell their homes by furnishing a comparison that makes them look good. Real estate agents use this technique all the time by showing the ‘‘dogs’’ first. This makes a good listing all the more appealing and reduces the chance a buyer will want to try a lowball offer. The second reason not to put a ‘‘for sale’’ sign up too early is psychological. Once you’ve put the sign in the lawn, you start disassociating yourself from the house. It’s for sale, and you don’t have anything more to do with it other than move out. The motivation to make those improvements is gone. As a result, they probably won’t get done.
Look at Recently Sold Houses As Well As the Competition If you’re working with an agent, she will look up what similar homes have sold for in the past few weeks as well as current homes for sale. Since no two homes are exactly alike, you may have to do some adjusting up or down to arrive at a sales price. To help zero in on how your home compares with the competition, go through homes for sale in your area that are similar to yours. Also check out a couple of new subdivisions near you that are selling homes in your price range. Why are you doing that? Because buyers are checking out the new construction and comparing your home to what they’re offering.
If You’re Selling on Your Own Even if you’re not working with an agent, you still can call two or three to look at your home and give you an estimate of what they think it’ll sell for as a starting point. You’ll need to be careful here; some agents will quote a high price, hoping to get you to list with them. You can also hire an appraiser for a few hundred dollars to do a formal appraisal. Finally, you can look at what similar homes in your area are selling for. However, don’t go by the ones that have been on the market for a long time; they are probably overpriced. Note which
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ones are selling and their price. This will put you in the ballpark of what your home is currently worth.
The Five Biggest Mistakes Homeowners Make Pricing Their Home 1. Don’t price your home on the basis of what you need to get
out of it. Going this route usually results in an underpriced or overpriced home, and both will cost you pain and money. The house market determines what homes will sell for, and buyers get savvy on values fast after they’ve looked at a few homes. 2. Many sellers feel they can add the cost of upgrades to their
price. Unfortunately, many upgrades don’t increase the value of the home but do make it more saleable. Other upgrades typically return from 40–80 percent depending on the market. For instance, a new roof will not add to value but will help sell the home. Adding a second or third bath can increase value in many cases. An experienced realtor can tell you what improvements will give you the best return. 3. Don’t list with the agent who quotes you the highest price. Go
with the agent who has the best track record and experience in your area. 4. Depending on the average selling time for your area, if you
don’t get an offer in a reasonable period, bite the bullet and lower the price. You’ve made a mistake pricing your home, and the longer your home is for sale, the lower the price you’ll get. Time is not in your favor. 5. If your home needs new carpets, paint, or other upgrades, get
it done as soon as possible. Don’t advertise a painting or carpet allowance, or you’ll end up getting a lower offer plus the allowance. Few buyers like to paint or carpet a home before they move in. It’s easier for them to keep looking until they find a home they don’t have to do anything to.
How to Handle an Offer Getting an offer on your home is an emotional event. It ranks up there with your first date: a disaster (lowball offer), so-so (you counter the offer), you’re hopelessly in love (full price offer).
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Lowball Offers The key to handling an offer is to corral the emotions so they don’t get in the way. You’ll feel anger if the offer is lowball. You’ll feel the buyers are idiots. Why can’t they see all the work you’ve put into the house? The decorating and colors you spent so much time deciding on, and the memories you’ve created in this home? These feelings are natural, and all buyers go through them at offer time. Luckily, your agent stays calm and lets you vent your anger before pointing out that many buyers start out with a low offer, that it’s best to contain your emotions and decide on what’s the lowest offer you can live with. Obviously, the buyers liked something about your home or they wouldn’t go to the trouble of writing an offer. Some people start out the buying process by writing a low offer, knowing you’ll counter up to your lowest price. So, that’s what you do. You’ll have about a 50 percent chance they’ll accept your counter or come back with another counter. If you don’t counter, you’ll have zero chances. If your counter is reasonable for the market and the buyers are serious, they’ll often take it. Sometimes bargain hunters will take a shotgun approach and write a bunch of low offers, hoping to get lucky. If this is the case, you won’t hear back from them. It was a one-shot effort, and you haven’t lost anything.
Almost, But Not Quite, Low Offers These types of offers are the hardest to work with. Obviously, the buyers want the home enough to put together an offer. It can be low because that’s all they’re qualified for, or they also have a second or third choice in mind. They may also be trying to get the best deal possible. You’re not always sure what their motivation is. If price or ego is the issue, you can sometimes sweeten the deal by throwing in the refrigerator, extending or shortening the closing, or whatever you think the buyer will go for. In one particular example, a buyer came in with a $10,000 low offer on a home that was priced at fair market value. The sellers wanted to reject the offer and not counter, but they finally cooled down and sent back a counter adding $9,800 and throwing in the lawnmower, hoses, and garden tools. They had bought a condo and were planning on leaving or giving the tools and equipment away anyway. The buyers accepted the counter. As it turned out, they were pleased to get everything they needed to maintain the yard, but most
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importantly, they felt they had won in the negotiating. They happily told their friends about all the equipment they had gotten the owner to throw in to make the deal. Many times, ego and emotions drive real estate deals, not concrete, wood, and nails. It’s important to be on the lookout for this. Many times you’ll get a low offer, not because the home is not priced right but because the buyers have to try. Their egos demand it. The best way to handle this is to structure the counter to let the buyers save face and accept your counter. Give a $500 concession or throw in the refrigerator, a washer, or dryer you don’t want to move. The key is not to get into an ego battle with a buyer, but to focus on the goal of selling the house.
The Full Price Offer Full price offers can sometimes be perilous also. When a full price comes quickly, sellers often wonder if they priced the home too low. If you’ve done your homework and priced it at market, it could be that you’ve gotten lucky. If your home is exactly what a buyer is looking for, a full price offer is not unusual. In one instance, a seller got a full price offer about 45 minutes after the home went on the multiple listing. Instead of being happy, the seller was upset. He felt the home must be underpriced, the agents were getting a windfall without doing anything, and he wasn’t prepared mentally. He assumed it would take a few weeks after putting the home on the market before anything would happen. The buyer’s agent had to explain that he was working with a family who wanted to be close to parents living on the seller’s street. They happened to be checking the multiple listing when the property came up, and they acted quickly. It took a couple of days of assurances, but the seller finally accepted the offer and the deal closed. Once you decide to put your home on the market, anything can happen. There’s a constant flow of buyers and houses circulating on the market. Someone could have an eye on your neighborhood, waiting for a home to go up for sale because it’s close to family or work. One other pitfall to look out for is full price offers from unqualified buyers. Sellers sometimes get so excited with a full price offer that they don’t look at the total picture. That the buyers are not prequalified or have a house to sell first seems to get lost. If the deal falls through, months of prime selling time go down the drain. In one particular situation, homeowners selling on their own took
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their home off the market for six months while working with a buyer who was trying to get qualified. When the homeowners were asked why they let the buyer string them along for so long, they replied . . . ‘‘because the buyer came in with a full price offer.’’
How to Handle Multiple Offers Too much of a good thing, like several offers on your home at once, can bring on a panic attack. Actually, if you’ve got your home in top selling condition and it’s a good market, the chances are good that you can end up with several offers at the same time. Should you be so lucky, here’s how you handle this situation: 1. Have your realtor inform all parties that there are x number of
offers on the property. If you’re selling the home on your own, then you’ll be informing all interested parties that you’ll be looking at all offers at a certain time. 2. If you’re working with an agent, the agent’s office would be a
neutral place to meet with the buyers’ agents and go over the offers. When you’re selling your home yourself, then have the buyers drop their offers off to you by the deadline. 3. Go over the offers and pick out the best one. If it’s a keeper,
sign it. If not, counter it with a time limit for the buyer’s acceptance. Next, take the second best offer and also counter it. But, write in that offer 2 is a backup offer and will kick in if offer 1 rejects your counter. It also has a time limit if it kicks in. Offer 3 and any other offers are handled in the same way. 4. If the first counter offer accepts, you’ve got the home sold on
your terms. If the buyers of the first counter say no, then the second counter offer gets an opportunity to accept or reject and so on down the line. With this approach, all parties are treated fairly, and you end up with the best offer possible with the least amount of brain damage.
How to Find and Work with Movers Moving is one of those ‘‘fun’’ experiences both buyers and sellers are going to have soon after closing. The moving industry has taken a lot of heat lately from the media on a few bad apples taking advantage of consumers. And the truth is that when it comes to choosing a mover, it’s definitely buyer beware.
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Because moving companies generally can charge what they want, it pays to shop around for not only the best price, but also for a mover that’ll get you there in one piece. There are several things you can do to protect yourself and not get taken. Here Moving Web sites worth are seven steps that’ll help make moving checking out: easier. www.amconf.org
1. Start by asking friends, coworkers,
and your realtor for names of movers they’ve had a good experience with. Get a list of at least six companies. Check to see if they’re a member of the American Moving and Storage Association (AMSA), a trade group that arranges arbitration to settle disputes.
www.moving advocateam.com www.monstermoving.com www.homestore.com/ move www.move.com www.moving.org
2. The next step is to narrow down
your list to the best three. To do this, check the Better Business Bureau for complaints and eliminate any who have had more than one or two in the past year. Also ask the moving companies if they have any contracts with corporate relocation departments. Call the references to see if the contract is still active and if there have been any complaints. Finally, call the remaining movers on your list and request a walk-through and Miscellaneous moving Web a written estimate. Ask if the bid is bind- sites: ing or nonbinding. A binding bid may www.buyboxes.com come in higher, but it discourages a mover from jacking up the price on mov- www.usps.gov/moversnet www.makethemove.com ing day. 3. Ask lots of questions and make
www.helpumove.com
sure you understand how the movers cal- www.bbb.org (Better Busiculate their charges. Typically, a mover ness Bureau Web site) charges by weight and distance, although in-state moves are often calculated by the number of man-hours it’ll take to get the job done. Look out for other charges such as packing and buying boxes through the mover, which can run up the bill big time. 4. Review the bids to see if they’re charging extra for packing materials, travel time, or whatever. Don’t be bashful about negotiating
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these fees down. The moving business is a competitive industry, and companies want your business. 5. Most moving companies include standard insurance coverage
as part of their bid. However, the coverage is for only 60 cents a pound. That means that if your 70-pound wide-screen HDTV flat panel you paid $2,100 for gets dropped, you’ll get paid $42 for it. That makes it almost mandatory to get additional coverage through your insurance company or the mover. Full replacement coverage gives the best protection and is also the most expensive. Of course, you’ll want to shop around and compare rates. Appliance life span: To help you decide if your appliance is worth paying to move, consider these average life expectancies: refrigerator, 11–13 years; electric dryer, 11–13 years; washing machine, 10–12 years; microwave, 9–11 years; iron, 7–9 years; mixer, 7–9 years; toaster, 6–8 years; coffeemaker, 3–6 years.
6. Many savvy consumers let their movers handle the appliances, large boxes, and furniture, and they transport the smaller valuable things themselves, even to the extent of renting a small trailer. 7. If there’s an insurance claim, you’ll need to show proof that the item exists and you own it. A good way to document this is keep a file of serial numbers and purchase receipts. Then photograph or videotape the items going onto the moving van. A tape or CD with images of everything important taken prior to or just after loading can back up a claim if, for example, your HDTV wide-screen gets broken.
Moving-Related Tax Deductions Deducting moving expenses: For more information, get IRS publication 521, Moving Expenses— 800-829-1040 or www .irs.gov
Moving for most people is high on the list of painful activities. But, if you can squeeze a tax deduction out in the process, it may help a little. Not everyone can deduct their moving expenses. The IRS rules that guide deductions for moving expenses are complicated, so it’s important to check with a tax professional. Generally, the IRS will allow deduc-
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tions if the move is job related and is 50 miles or more away from the old employment. If your job-related move qualifies, you could write off the moving company’s bill, packing costs, and storing household goods within 30 days of relocation. Also possible are one-way travel expenses to your new house. Travel expenses can add up to thousands of dollars, and if you qualify, you can get a hefty tax break that year.
Moneymaking Garage Sales Whether you’ve bought a home, sold a home, or both, the cold, hard reality of moving means that you have to make some hard choices, like Earl and Shirley did when they sold the home they had lived in for 27 years and bought a motor home. The only possible way they could get rid of the mountain of ‘‘stuff’’ they had accumulated over the years was have a garage sale. In their case it was several garage sales over three weeks. During the week they Garage sale Web sites: would pull stuff out of the nooks and www.yardsalesupplies.com crannies of their house, garage, and storage shed and get it ready for sale on week- www.garagesaletools.com www.yardsailor.com ends. Luckily, they had a lot of help from www.gsonly.com some accomplished garage sale veterans. www.insiderreports.com Here’s how they made thousands of dollars and had a lot of fun. The first step is to decide what you want or have to get rid off. If you’re moving into a motor home or condo, that means just about everything. To help motivate you, remember—the more you sell, the more money you make, and the less you have to pack. The less you have to move, the cheaper it is. You win two ways.
How to Decide What to Sell Since you’ve sold your home, the pressure is on to get rid of as much stuff as possible. Rule number one is that if you haven’t used it in the last year (some say six months), add it to the sales table. Why spend money moving it to your new home? Next, don’t try to predict what people will buy, just add it to the sales pile. One woman who had never thrown away a pair of shoes in
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20 years, put out four dozen pairs under pressure from her husband. She was amazed to sell three dozen pairs in two hours. The goal is to turn as much stuff into cash as you can. What you don’t sell you can donate to a charity the day before the moving van arrives. Also, the more stuff you have to sell, the more people will come. So, you may want to get neighbors, friends, relatives, or anyone you can get to join in your garage sale. Perhaps you can get your neighborhood, cul-de-sac, or even the whole subdivision to join. Many subdivisions and even small towns have yearly garage sales/flea markets that attract thousands of bargain hunters.
How to Price Items for Sale Pricing is the second hardest task most people have in organizing their sale. The first is deciding what to sell. But, since you’re moving, the thought of paying big bucks to move an item should temper the urge to keep it. Still, it’s important not to project your sentimental attachment into the pricing of an item. For furniture, TVs, stereos, lamps, appliances, etc., start by estimating what an item would sell for new and then discount it 75 percent. For example, the leather sofa that you bought nine years ago for $700 would get a price sticker of $175. Assume buyers are knowledgeable and know values. The reason they come to your garage sale is to find a bargain. Remember the bargain hunter’s psychology—if you price one item too high and a buyer spots it, she will think everything is priced too high. For old stereo systems, record players, and other obsolete electronics, price way down, say, $20–$30 or less. If you don’t sell them, there’s no other market, and they’ll end up in your give-away pile in a day or two. They may even make good loss leaders to keep buyers looking around. The longer they stay, the more they buy is the sales song of veteran garage sellers. For example, Earl and Shirley found several cases of old but still good Ivory soap bars in a corner of their basement. They put those on a small table priced at fifteen cents a bar with a ten bars per person maximum. The purpose was to get the bargain hunters’ juices flowing in anticipation of finding other good bargains. Clothing items are usually priced in the $1.50–$5.00 range, and used shoes and sandals sell best when priced less than $3.00 a pair. Don’t sell clothing that is damaged, dirty, stained, or torn; it can hurt your credibility.
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Hang the best quality clothing on a rack. It’s effective to call attention on the price tag to the brand or original cost. For instance, you may write: ‘‘Eddie Bauer leather jacket $250 new, now only $45.’’ For lesser value items loose on a table, an effective pricing strategy can be $3.00 each or three for $6 or $7 to increase sales volume. Another profitable pricing gambit is to sell tools, fishing tackle, or anything you can separate as single units. For example, instead of selling a toolbox full of tools, sell each tool separately, and instead of a tackle box full of lures, sell each lure for, say, 25 or 50 cents. This can up your profit considerably on high demand items.
How to Advertise Your Garage Sale The keys to a great garage sale are timing and advertising. To attract the most people, you need to time it so that the most people possible will come. A warm sunny day is your first choice. If you live in Seattle, that may not be possible, so you may want to consider using your garage or renting a tent to keep everything dry. The next step is to determine when most people in your area get paid. If it’s the first and fifteenth, schedule the sale as close to those dates as possible. You don’t want to have your sale around a holiday weekend. If something is happening, that will siphon off potential buyers. The best days are Friday, Saturday, and Sunday. Friday is a good day to start because you’ll attract the buyers who work on weekends. It’s surprising how many people hit the garage sales first thing on Friday morning. Of course, Saturday and Sunday will usually attract the most shoppers. Good times to run the sale are 8 a.m. to 6 p.m. on Saturday, and to 9 a.m. to 4 p.m. on Sunday, or as long as shoppers are coming by. Check the newspapers in your area to see what times are most popular. If everyone is starting at 9 a.m., try starting at 8 or 8:30 to get them to come to your event first. Advertising your sale is critical to getting the most shoppers possible. First, determine which papers carry the most garage sale advertising and put ads in them. Don’t forget the local weeklies and the pennysaver publications with stands around the area. The bargain junkies you want to attract look at these local publications for good deals and upcoming sales. Company, religious, and other organizational newsletters are also great sources of advertising. Putting up flyers at work and around the area is effective. Start a week before the sale to get maximum effect.
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How to Effectively Write Ads and Flyers The bigger the sale, the more stuff shoppers have to look at, so size is a dominant feature you’ll want to include. Phrases such as neighborhood, 15-house, multiple house, area, and other words that convey how big the sale is will catch attention. Next draw in the reader by giving a few tantalizing examples of demand items for your area. List some examples such as baby clothes, patio furniture, specific appliances, and furniture. Also important is clear, precise directions on how to get there. Make liberal use of landmarks in your instructions, such as, ‘‘turn left at the Longmont Burger King’’ or ‘‘one block south of Middleville Safeway.’’ Also have the date and times, but no phone number. You want them to come by, not call you. One particular ad that worked almost too well was: Moving/Estate Sale Nothing thrown away in 30 years Furniture, appliances, books, tools Kitchenware, freezer, you name it. Everything must go including house Sale Friday & Saturday 7 a.m. to 3 p.m. The next morning at 7 a.m. the line was long and the people were waiting impatiently. The sales were frantic all morning and into the late afternoon, well past the advertised end. What made this ad work so well? The words estate or moving sales are always powerful. The fact that everything was up for sale including the house was a compelling draw. And possibly, the mental image of a house full of 30 years worth of collected stuff for sale stirred bargain hunters into a feeding frenzy. A couple of days later the house—nearly empty by now—also sold because of the publicity and activity generated by the garage sale.
Directional Signs Are a Must Another important tool for bringing in buyers is the directional sign, the more the better. These signs can be simple, with the words ‘‘Garage Sale’’ and an arrow. Many home centers sell these signs with wire frames that stick into the ground. Put signs at all intersections within a two-block radius and roads that feed into your area. Attaching balloons or flags will make them
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even more visible. Realtors often use balloons tied to their open house signs to add to their visibility, and it works. Printing the garage sale information on brightly colored index cards and sticking them around the area on bulletin boards or wherever you can also help draw attention to your sale. You can also buy strings of brightly colored plastic flags in 50–100 ft. lengths that will add considerably to the visibility of your site.
How to Set Up the Sales Site A day or two before the sale, price tag everything so there’s no question what the prices are. Use tags or masking tape with the price written on with a black marker. A good shortcut is to put $1 items on one table, $2 items on another table, and so on. Next, spread the goods out as much as possible. Make it easy for shoppers to walk around tables and see what you’ve got. Put the best goods in front so that drive-bys can see this is a sale worth stopping at. Make sure clothes are clean, pressed, and on hangers. If you have a lot of kids’ clothes, bag and label several same-size items for $x a bag. Have a table up front with tools, camping gear, and fishing stuff to attract the male drive-by. Likewise, package a few toys in plastic bags to sell to the kids for 10–25 cents to keep them happy and the parents around longer. If you have appliances, run an extension cord to a table so buyers can make sure everything works before buying. Also important is to get a supply of small bills and change, since garage sales are a cash business. Have at least 20 $1 bills, 5 $5 bills, 5 $10 bills, and 2 $20 bills. For change, get a roll of quarters, dimes, and nickels. No credit cards unless you’re set up for it and can process the transaction on the spot—and absolutely no checks—no exceptions. Finally, make sure you have enough parking. Let the neighbors know what’s happening and thank them for being cooperative afterward. Good will is always important.
Preparing Your Stuff for Sale It’s a good idea to make your stuff look as good as possible. Clean, repair, and polish everything so that it looks its best. First impressions often make the difference between a sale or a reject. Also make the tables as neat and attractive as possible. This often means constant effort to keep them that way, but it’s worth it. A well-
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organized site gives shoppers the confidence to look a little longer and buy more.
Negotiating Tips Many people hesitate to have garage sales because they aren’t comfortable dealing with shoppers or they lack confidence in their negotiating ability. The first step in overcoming these doubts is to realize that it’s not a matter of win or lose. You want to sell and the buyer wants to buy. It’s like a friendly chat over coffee. You bat the price back and forth in a friendly way until you both agree and it’s a done deal. True, 95 percent of garage sale shoppers will want to talk you down. They’re bargain hunters, and that’s why they’re there, to get the best deal they can. You know that, so you anticipate and plan for it. One technique is to price your goods a little high so you can come down. For example, if you have a lamp that you feel will sell for $10, price it at $15 so that the buyer will feel she got a bargain by talking you down. If you reach an impasse, offer to split the difference. She offers $8, you counter with $12, and then you offer to split the difference at $10. Many shoppers will go along with that. The keys to remember are: Keep it friendly, don’t get too serious, and don’t forget it’s not a win-lose contest. That way, you’ll have a lot of profitable fun.
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Buying a Manufactured, Modular, or Mobile Home Many homebuyers have the attitude that if it’s not stick built, they’re not getting a good house. That may have been true once, but with current materials and building techniques, you can get a manufactured or modular home that rivals or even surpasses stick-built construction. And you may not even be able to tell the difference once the house is set up and the landscaping in place. Manufactured house styles and amenities have also come a long way in the past few years. You can create your dream home in a twostory, rambler, or contemporary style with customized floor plans, exterior, and colors. According to Manufactured Homes: The Market Facts 2002 Report put out by Foremost Insurance Group, 88 percent of the manufactured homeowners surveyed said they were very or somewhat satisfied with manufactured home living. Additionally, 57 percent said they always plan to live in their current manufactured home. That’s not very good news for the resale market! Manufactured and modular homes are built in sections under controlled conditions at the plant, then shipped to the site and assembled. This can give you better quality control and lower labor costs that translate into serious savings compared to a stick-built home. Typically, you can plan on saving about $25 or more per square foot when you go with a manufactured or modular home. On a 1,300 square foot ranch, for instance, the savings would be about $32,500 less than a comparable on-site-built home.
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In rural or remote areas, where it’s difficult to find good contractors and subcontractors, a modular or manufactured home can be the best way to get the home you want with all the amenities. Plus, these homes meet all state and federal building codes and can be financed with FHA, VA, or conventional 30-year loan programs. However, like any other housing option there are pluses, minuses, and pitfalls to look out for that can cost you big time. This chapter shows you how to avoid those pitfalls and get the best deal when you buy a manufactured, modular, or mobile home.
The Different Kinds of Manufactured Homes There are basically four types of manufactured houses: modular, panel, precut or kit, and mobile homes. The first three vary by how much of the home is done at the factory and how much site work is needed. Mobile homes are typically completely finished at the factory and shipped Web sites you’ll want to to the site in two or more sections. The check out: sections are joined and anchored permanently on a concrete foundation. www.modularcenter.com Manufactured homes are built to a www.servicemagic.com federal building code called the Manufacwww.skylinehomes.com tured Home Construction and Safety www.silvercrest.com Standards (HUD code) and will display a www.mobilehome.com red certification label on each section. While this is a federal building code, each www.factorybuilt state has its own building code that usuhousing.com ally follows the Uniform Building Code www.mfg.org (UBC) or the newer International Building Code (IBC). These local building codes can exceed the federal code.
Modular Homes Sometimes called sectional houses, they are almost completely built in the factory. With construction done on an assembly line in a controlled environment, completion times are fast and quality control is high. Each step of the process is inspected, and the final sections are tagged certifying that the home complies with all state and federal building codes. They are a far cry from the double-wide trailers most homebuyers think of when modular homes are mentioned.
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Unlike mobile and manufactured homes, modular homes do not have a permanent steel undercarriage. As the home sections come off the assembly line, they are loaded onto carriers for a ride to the home site. Because of federal and/or state highway ‘‘wide-load’’ size restrictions, sections will typically be 12 or 14 feet wide and up to 60 feet in length. At the site a crane lifts the sections onto the foundation, where they’re connected and permanently anchored. Utilities are connected, and the home is usually ready to move into within a week or two. This is a big plus when you consider the months that would be needed to stick build the same size house. It’s a big advantage knowing up front exactly how much the home will cost, when it’ll be done, and when it’ll be delivered. Home style options are limited only by your imagination. Several sections can be stacked to create a Cape Cod, modern two-story, multilevel, or connected horizontally for an L-shaped ranch style home. There are even condominium projects and duplexes made from modular sections. Most manufacturers have design departments that can help you customize a floor plan to fit your dream. Popular options are vaulted ceilings, upgraded kitchen cabinets, countertops, and steeper roof pitches.
Panel Homes Panel homes, like modular homes, come in a wide variety of styles, sizes, and plans and are built in factory conditions similar to modular homes. The biggest difference is that panel homes are shipped in panels typically 8 feet high and up to 40 feet long. Doors, windows, and wiring can be factory installed into the wall panels. The panels are shipped to the home site and connected on site. The house can be erected and enclosed in a day or two. The interior finish work is then completed, and the home is ready to move into within a week or so. The advantages of panelized homes are similar to modular homes. Quality control is usually high because the homes are built in a controlled environment, and they meet or exceed federal and state building codes. You can also order the kit and finish the interior yourself. If you or Uncle Joe is a finish carpenter, you can save some bucks and time by going this route. Otherwise, you can have factory site crews complete the interior as part of the package.
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Panel homes come in many varieties from a bare bones structure for the do-it-yourselfer to a complete package with everything included to finish the home. The main advantages of panel homes are: The structure can be up and weather tight in a day or two. You can get a package that allows you to do as much work as you want to take on. In areas where contractors or good subcontractors are hard to find, panel homes can give you a quality home for less money and a lot less construction time than a stick-built one. Panel homes are built to federal and state building codes, so they qualify for FHA/VA and conventional 30-year financing.
Precut or Kit Homes As the name suggests, a kit home is just that. All the components of the home are precut at the factory and shipped to the site ready to build. It’s kind of like a model airplane or car. All you have to do is put it together, and it’ll look like the picture on the box. Many log, timber frame, and specialty homes come in kit form because of the specialized materials and hardware needed. And you can build the house or hire the dealer’s crew to put it all together. You can buy a precut or kit home in just about any size or style, from your plans or theirs. You can choose the quality and upgrades you want and can afford. You can also choose how complete you want the kit, from the structure only to a complete house with nails included and ready to build. For the do-it-yourselfer with some spare time, this can be a ticket to the most house for the least money. The biggest advantages of kit homes are that you get everything you need precut and ready to go on site. There’s no waste unless you make a mistake. Depending on the area, you should be able to get the lumber and components cheaper than if you went to the nearest Home Depot. To see how much you would save, get a lumber list from the dealer on a home plan you’re interested in and price it at your favorite lumberyard. Also, while you’re at it, compare the hardware and appliances offered with the kit to what you can get locally. Building a kit is going to be like constructing a stick-built home with you as the general contractor. You’ll need to schedule local build-
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ing inspections for each phase and hire subcontractors for the installs you don’t want to tackle, like plumbing, electrical, or sheet rocking. The bottom line is that you can save quite a lot of money if you’re handy and want to do most of the work yourself. In addition, having everything on site and ready to go can save you considerable time running around as well as eliminate mistakes and waste. Financing a kit home is similar to financing a stick-built home. Most lenders will go along with the financing when there’s a contractor involved. If, for example, your brother-law isn’t a contractor and you plan on going it alone, you’ll need to convince a lender you have the background and skills to do the job. Even then, you may have to jump through a few extra hoops the lender may require to limit its liability. If you’re building a log, timber frame, geodesic, or other unusual style home you may have to shop around for a lender who specializes in these types of homes. The dealer should be able to give you a list of references.
Mobile Homes Forget everything you’ve heard about mobile homes, especially the Hollywood image of cheap trailers and seedy mobile home parks. New technology and improved materials are making mobile homes an attractive housing option. In fact, the name mobile home may no longer be an accurate term. These homes are built in factory conditions using quality materials to meet federal and state codes. Unlike a modular home, mobile homes are built on a steel undercarriage. The wheels are used to transport the sections to the site where the home is slid off the carriage onto a foundation and permanently anchored. The terms mobile and manufactured home are almost interchangeable, since both are transported in sections and joined at the site. The fine line difference is how much finish work is done on site. If you want to split hairs, you could say a mobile is completely finished at the factory and the sections joined at the site. A manufactured home may have siding or other finish work done on site to make it look more stick built.
Owning vs. Renting the Lot Throughout the country there are attractive manufactured home developments where you own the lot. Sometimes a homeowners associa-
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tion similar to those of a condo or town house project takes care of the grounds and amenities. In the Southeast and in Sunbelt areas, some developments approach those of expensive gated communities with high-end amenities such as golf courses, clubhouses, and equestrian trails. Buying a manufactured home can be a good investment if you buy the lot with it. If you choose an area or subdivision carefully, your home will tend to hold its value. However, if the home is on a rented pad, you’re subject to all the reasons why you don’t want to be a tenant. Why pay a monthly pad fee when you could be building equity in your own lot? Also, if the landlord doesn’t keep up the park or the area deteriorates, you may not be able to sell. If you’ve financed most of the purchase price and values drop, you may end up owing more than the house is worth. Realtors like to call this negative or upside down equity.
A Manufactured Home Can Make a Great Starter Home Manufactured homes can be a good starter home for the following reasons: The average cost of a manufactured home is roughly half that of a stick-built home. A manufactured home can often be ordered, delivered, set up, and ready to move into in four to six weeks, and sometimes faster, if you go for a model the dealer has on hand. All manufactured homes must be built to HUD/FHA construction standards, making financing with low down and market rates possible. You can get manufactured homes with more than 2,000 square feet of living space in two and three sections with slide-outs, garages, and other options. Manufactured homes mounted on permanent foundations in good areas tend to hold their value and will most likely appreciate.
Manufactured Home Money Matters Standard costs for a modular home will run $50 to $60 a square foot, with the most popular size homes in the 1,700 to 2,000 square foot range. Some builders also have high-end or luxury series that can run
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$80 to $100 a square foot with homes up to 5,000 square feet or more. However, a typical 3-bedroom, 2-bath, 1,800 square foot home will cost around $100,000, plus site work. The financing options for modular and manufactured homes are the same as financing a stick-built one. FHA/VA and conventional loan programs are available from the same lenders as you would use for a typical subdivision home. Most home dealers or manufacturers have lenders they work with that can finance the total package of home, site work, and land. But, like shopping for a single-family home or condo, it’s important to shop around and compare loans. Dealer loan packages that finance the lot, site work, and home are convenient but not always the most economical. You may save money by getting a construction loan through your bank or credit union and the 30-year loan through a mortgage company. As covered in Chapters 2 and 3 on financing and working with a lender, the only way to know if you’re getting the best deal is to talk to several lenders and compare Good Faith Estimates. One financial plus of a modular or manufactured home is the shorter length of a construction loan if you take one out for the lot and site work. You pay interest for weeks instead of months. For example, if you bought a building lot for $50,000 and financed it for 6 percent interest, your monthly interest bill would be $250. Assume you spend a month or two fine tuning your house plans, getting the permits, and lining up your contractor or subcontractors. If all goes well, the construction can be completed and the home ready to move into in about six months. You’ve spent $1,500 in interest on the lot alone. If you had ordered a modular home, it’s likely you would have been moving into the home in four to six weeks. Your lot loan interest bill would be around $375, saving you more than $1,100. If you were to add in the construction interest of stick-building the home, the bill would be several thousand dollars more. The bottom line on financing is to shop around and compare at least three lenders’ rates. Don’t assume that the dealer’s deal is the best, even if he throws in inducements or extras. In fact, you should be wary whenever a dealer or builder offers extras to go with the financing. Somebody is paying for those extras, and that person is usually you.
How to Shop for a Manufactured Home After you’ve talked to two or three lenders and gotten their best deals written out on Good Faith Estimates, the next step is shopping time.
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Keep in mind that a good lender who is knowledgeable about manufactured homes can also help you narrow down your dealer list. She probably knows which dealers have the best reputations. Many dealers have model homes set up on site you can go through and get ideas. Others have subdivisions with both model homes and lots for sale. Since you’ll have about the same options as a stick-built home, it’s a good idea to work up a list of wants and needs so that you can determine what style and floor plan will work for you. The Home Shopping Checklist in Chapter 4 will help you do this.
Ten Shopping Tips to Help You Make the Best Choice 1. Like most other things, higher quality costs more in the begin-
ning but not in the long run. So go for the best built home you can qualify for. A top-of-the-line model will hold its value better when the time comes to sell and move up. 2. Shop around for a model that doesn’t have the mobile home
silhouette, in other words, a rectangle with a flat roof. Many manufacturers have models with steeper pitched roofs, porches, and even slide-outs that get away from a boring rectangle. 3. Look closely at the furnishings that often come with the home.
Many times they’re low end, and you would be better off buying them elsewhere. 4. To get a good idea of what’s available, go to regional trade
shows where you can see the latest innovations from many mobile home manufacturers at one time. Any manufactured home dealer can tell you when and where they are for your area. 5. Visit several dealers and price similar homes. Look out for the
model loaded with options that you may not want or need that are included in the price. Get a breakdown of all the costs. That way you can tell what items you don’t want and may be able to eliminate or trade for something you do. 6. Check on the dealer as you would a builder. Call the Better
Business Bureau and see if there are any complaints. The bank that does the financing is another good source of information.
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Also, talk to several past customers and see if they’ve had any problems and if they would use their dealer again. 7. Modular home builders will usually quote you the base model
price with the cheapest appliances, finishes, and fixtures. The molding, windows, floor coverings, and fixtures will often need to be upgraded a notch or two. To be realistic, plan on adding $5,000 to $10,000 to the base price to get what you really want. 8. Consider adding more windows or going with bigger windows
that will make your home more livable and add to its value if you resell. 9. Upgrading the tub and shower stalls are a good investment
and helps the home keep its value. Also consider upgrading fixtures. Bottom-of-the-line faucets and other fixtures lose their shine fast and will need replacing in a couple of years. 10. Curb appeal not only gives you pride of ownership but is im-
portant to maintaining your home’s value. Adding trim in a second color or upgrading the exterior is worth considering. It’s important to remember that sooner or later all homes sport a ‘‘for sale’’ sign. If you keep that in mind when you buy, selling will be easier and more profitable when you outgrow the house or get a job transfer.
Tips on Buying a Building Lot The real estate truism that location is everything should guide you when you’re shopping for a building lot. You control your housing destiny more because you pick the location. And that means you’ll need to do more homework to make sure you get the best location possible. It’s important to remember that a great house on a bad lot will not be as good an investment as a smaller house with a great location. The extra time and effort you spend finding the best location you can afford will pay bigger dividends later on. The first step in lot shopping is to make a list of all the possible sites you’re interested in. The more lots you have to choose from, the better. Once you’ve completed the list, the next step is to start the process of elimination. The following tips will help you do that.
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Check with the city or county planning authority and see what’s planned for the area. If there’s a master plan, study it carefully. The secluded lot you love now may be next to an industrial park in 10 years, according to a zoning master plan. Look at the growth patterns for your area of interest. If all indications are that the area will increase in value, that’s a plus. Also, check and see if any highways, off-ramps, or access roads are planed for the area. And, of course, find out if the area is currently on the upswing or is declining in value. Get a copy of any zoning and restrictive covenants (CC&R) for the development or area. The better the area, the more restrictions on what you can build. However, that can often be a plus because restrictions tend to keep home values up. For example, Brent and Susan found a great deal on a lot next to a newly completed golf course that the local municipality was selling as surplus property. A look at the CC&Rs revealed that homes had to be 1,200 square feet or more on the main floor along with an attached two- or three-car garage. The restrictions also limited their landscaping options and required an underground sprinkling system to keep the lawn and shrubs in good condition. Brent and Susan were planning on putting a modular home on the property and had picked out the plan they liked. Unfortunately, it was only 1,150 square feet on the main floor and had a carport instead of a garage. Getting in touch with the design people at the factory, the homebuyers were able to increase the square footage and enclose the carport to create a garage. This stretched the loan they could qualify for to the limit, but they felt it was worth it. Area values should increase in the years ahead and justify the additional expense. Check out the cost of utilities. A cheaper lot that costs more to run utilities into may not be as good a deal as one that has them stubbed at the property line. For instance, it’s usually more expensive to run electrical lines underground than overhead. And running water, waste, and gas lines at $10 to $20 a foot each, depending on the area, can run up site costs fast. Make sure you have all your building site ducks in a row. Get all the necessary building permits, utilities, and hookup fees nailed down. Next get the site-work subcontractors lined up and bid prices locked in and in writing if the home dealer doesn’t handle that.
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Sources of Building Lots The best and easiest way to find a building lot is to contact a realtor who works in your area of interest. Many times they will know of developers who are selling lots to builders or can check the multiple listing for what’s available. Another good source is newspaper classifieds under ‘‘building lots.’’ If you’ve exhausted these sources, you’ll need to get a little more aggressive and drive around your area of interest to look for possible lots. Sometimes, homeowners will buy a double lot when they build and keep one for an investment or for a family member to build on in the future. But in the ebb and flow of human events, plans and circumstances can change quickly. A vacant lot that’s not for sale today may suddenly be for sale tomorrow or when a serious buyer calls offering money at an opportune time. Randall and Sharon discovered this when they couldn’t find a lot for sale in the area they lived in. What few lots were available were tied up by builders for spec or custom home jobs, and they weren’t interested in selling. As a last resort, Sharon started driving through neighborhoods and areas they liked, looking for vacant lots. She made a list of those that looked interesting and got the names and addresses of the owners from the county recorder’s office. It wasn’t long before she had a list of eight possibilities. Three of the lot owners lived out of state, and from their addresses on the tax records, Sharon was able to get their phone numbers. Her next step was to contact the owners on the list and see if any were interested in selling. Five local lot owners were not interested, but one of the out-ofstate owners expressed interest. The couple had bought the lot a few years ago, but a job transfer had changed their plans, so they kept the lot as an investment. But now that their son was going to a local university, they had been thinking of selling. Ron and Sharon offered the lot owners the appraised value for their lot and agreed to split the cost of a certified appraisal. The sellers accepted the offer and the deal closed three weeks later. This proactive approach often works because many owners don’t think of selling until someone contacts them and starts the wheels spinning.
Building Permit and Site Fees If you’ve hired a general contractor, getting the permits, estimates, and lining up the subcontractors will be part of the bid. But, if you’re doing
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your own paperwork and lining up everything for the factory site crew when the home arrives, you’ll have to get the building permits yourself. Typically, you’ll go down to your city’s building department and get a Building Permit Application packet to fill out and submit, along with a set of plans from the home manufacturer. You’ll also have to pay a nonrefundable deposit or application fee. Within a week or two (hopefully) you’ll get the paperwork back with a list of fees. In most cases, these fees will have to be paid before you’re issued a Certificate of Occupancy and can move in.
Typical Fees The list of fees you’ll pay is usually called the building fee schedule. These fees vary from city to city and range from almost nothing to thousands of dollars. Some of the most common fees you’ll find are building fee, plan check fee, water connection, utilities connections, water development, sewer fees, and environmental impact fees. The list sometimes gets long and grim, with all sorts of fees before you reach the total line. Depending on the area, lot, and site, fees can run from 50 percent to nearly equal the cost of the home. For instance, if the cost of the home is $70,000, the site work can run about $30,000 plus the cost of a lot. If the lot is $32,000, the total cost of the home will be $132,000. A similar size stick-built home in many areas would cost about $160,000, depending on land and permit fees.
Resale Value of Manufactured Homes Manufactured homes can appreciate and be a good investment. If the site is chosen carefully and the landscaping is attractive, the home can go up in value similar to a neighborhood of stick-built homes. But, like other neighborhoods, the condition of your neighbors’ homes will play an important role in how well your home maintains its value. As you may have guessed, the two biggest home-buying groups buying manufactured homes are entry-level homebuyers and retirees. Each group presents a slightly different approach to shopping.
Entry-Level Subdivisions If you’re buying in a new subdivision that attracts entry-level buyers, chances are that when you’re ready to move up, so will others who bought at the same time. Condo projects that attract first-time home-
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Site Improvement Checklist In construction lingo, the gas/propane, electrical, sewer/septic, and water lines are called laterals. The cost of these lines is determined by size, type, and length (setback) from the house to the POC (point of connection). Always get two or three bids if possible when considering a contractor. It’s also important to check references and several past jobs before you commit. A little homework up front can save you a lot of pain and money down the road. Gas Line Contact the gas company for the location of the gas line and if the line is stubbed on your side of the street. If it’s on the other side, you may have extra fees. Usually, you dig the trench and the gas company runs the line and sets the meter. Get any other costs that may be involved. If you’re going with propane, call two or three propane companies and get pricing for the fuel, set tank, run line to home, and changing appliances to propane if needed. Electrical Call the power company and find out what the hookup costs will be. Get bids from two or three electricians to run overhead and/or underground lines. Sewer/Septic Call the city office and find out what the connection fees will be. Get two or three bids for running the sewer line from the street to the home site. If you’re going with a septic system, call two or three contractors and get bids for the lines, fields, tank, and installation. Check on a percolation (perk) test. Sometime a perk test can take months, so check on this before you commit to buying the lot. Water Call the water company for connection fees, location, and size of lines. The contractor who does the other lines may be able to include the trenching for the water lines in the bid. Get bids from a plumber, if needed, to run the water lines and do the hookups. If you’re going with a well, get bids with a cost breakdown sheet from two or three drilling companies.
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Total Home Cost Worksheet Once you’ve filled out the worksheet, you should know exactly what your home will cost. From this data, your mortgage lender can work up a Good Faith Estimate of what your down payment, closing costs, and monthly payment will be. If you don’t have the fees from the Building Permit Application, call the city building department, and it should be able to give you a close estimate.
Total cost of home, including taxes, processing, and options Cost of building lot Total cost of fees from Building Permit Application Utility hookups: water, power, gas, sewer, etc. Foundations and footings Basement (include windows and doors) Concrete flat work: sidewalks, driveway, patio, stairs, etc. Laterals: sewer, water, gas, etc. Excavation and trenching Garage or carport Porches, decks, and covered patio Well: drilling costs, pump, pressure tank, and line to house Septic system: excavation, fields, tanks, etc. Air-conditioning Crane or roll on costs Other costs Bottom line, the total cost of your new home:
Mortgage data from lender: Down payment needed Mortgage loan amount Monthly payment
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
$ $ $
Recommended Options or Upgrades 4:12 pitch roof. (Roof angle drops 4 inches per every foot). You want to avoid the flat roof look of mobile homes. Go with vinyl or other low maintenance siding. Avoid cedar or other wood siding that needs staining or painting every few years. 200 amp service box. Upgrade appliances or order without if you can get a better deal elsewhere. Get the make and model numbers of the appliances you get from the factory and compare. Gas water heater and furnace if gas is available in your area.
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Have the wiring done for ceiling fan and light fixtures. You may be able to get a better selection and price at local home centers. Upgrade molding for looks and protection. Go with heaver six-panel door upgrades. Check factory installed carpet quality and price. Comparison shop for a better deal. You may be able to save by taking advantage of sales and roll end discounts. Go with the best window package you can afford. Bigger and more windows add to the value and your enjoyment of the home. Upgrade shower enclosures and fixtures. These are important to maintaining the home’s value. Comparison shop for air-conditioning. Consider getting the AC wiring installed only if you can get a better deal elsewhere. If your budget allows, avoid putting a swamp cooler on the roof. Sooner or later, it’s going to leak, causing unsightly damage to your roof and ceiling. Upgrade kitchen cabinets. This is an important item in adding to the value of your home and making it look good. Factory Options You Want to Avoid Whenever possible, get a price list of standard and optional items. Shop and compare quality and price before you decide. Avoid the following options: Ceiling fans; you can buy them cheaper locally Storm doors Aluminum windows 2 4 exterior wall framing Any kind of wood siding that needs frequent staining or care Gas or wood burning stoves Skylights Furniture or decorating items like blinds and drapes Accessories you can add inexpensively, like towel holders. Extended warranties: look carefully before you buy them
owners experience the same situation. This can result in more homes for sale in the area than there are buyers for them, and prices drop. Values will often stay depressed for several years until supply and demand even out. So when you buy, look at the demographics in the community you want to buy in and if they will mesh with your future plans. Brent and DeAnn had this problem when they bought a home in a subdivision of manufactured homes. It was an attractive community with great landscaping, a pool, and a clubhouse. The homes were similar in price and attracted mainly young first-time homebuyers who could afford the low down FHA financing.
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The first five years were great for Brent and DeAnn, but as their family and income grew, so did their desire to move up to a bigger home closer to work. Three bedrooms were no longer enough, with their second baby on the way. When they decided to put their home on the market in the spring, about a dozen other ‘‘for sale’’ signs appeared around the community. Some homeowners who were under pressure to sell because of job changes or because they had found a bigger home reduced their price. This created a downward price spiral, as realtors and appraisers priced homes based on what others had sold for the last few months. Because Brent and DeAnn had put a lot of effort into making their home attractive with good curb appeal, they were able to sell at close to a breakeven price. True, if they had been willing to stay for a few more years, they could have built up some equity. But, in their case they just wanted out so that they could move on with their life and were happy to walk away from closing with zero profit.
Retirement Subdivisions Communities that cater to retirees are usually more stable than those that attract first-time homebuyers. They normally don’t have a threeto five-year selling bubble that can depress prices. These homeowners often stay until they move into a nursing home or die. This often results in a relatively stable home market with the number of homes for sale roughly equaling the number of buyers. In some upscale communities with a big demand, there can even be buyers circling and waiting for a home to come on the market. As a result of supply and demand, homes in these areas can consistently go up in value. Even though you’re retiring and plan on staying in a home forever, it’s still important to buy in the best area possible. You’ll enjoy the community more, and if you decide to sell the home it will have appreciated in value. To make sure you’ll like the community, walk around the lots or homes you’re interested in. Meet the neighbors on both sides and across the street. Ask questions about the area and read the restrictions and homeowners association rules. If there are problems, you’ll hear about them fast. The bottom line in buying a manufactured home in a retirement community is to go for the best location you can afford. If it’s a new community, look at the area closely. Make sure there’s nothing in a
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master plan like a freeway, airport expansion, or planned rezoning in the works that could lower values.
The Bottom Line on Buying Modular and Manufactured Homes It may seem that after you’ve visited a few dealers, buying a manufactured home is like buying a used car. You have to wade through the gimmicks, canned sales pitches, and lots of hype. Unfortunately, that’s the way it is, but you can protect yourself by following the shopping tips in this chapter. Buying a manufactured home can be a great way to go if you do your homework first. For additional information, check out Buying a Manufactured Home, Kevin Burnside, San Francisco: Van der Plas Publications, 2002; and Manufactured Houses, A. M. Watkins, Dearborn, MI.: A Kaplan Professional Company, 1994.
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How to Avoid the Fifteen Costliest Mistakes Homebuyers Make No one likes to make mistakes; they’re not only time consuming, but they can cost you a lot of money. This chapter is a quick read to help you avoid the most common home buying mistakes, along with suggestions on how to correct them.
Mistake 1. Not Planning Your Move Many first-time homebuyers who are renting get into problems with their lease. They make an offer on a home, forgetting that they still have several months left to go on their lease. Sometimes, there’s a stiff penalty when you break a lease. Other times, you just forfeit your deposit or the landlord may hold you to the balance left on the lease. In one particular situation, a young couple made an offer on a home with a $1,000 deposit that was subject to mortgage approval only. When they informed their landlord that they were moving, he politely informed them they had three months left on their lease. They could move out, but he expected a check for the three months or $2,700, or he would enforce the terms in court. In the end, the homebuyers couldn’t cover both the down payment and the remaining lease payments, so they lost both the house and their $1,000 deposit. The lesson learned is that if you’re renting, read your lease agreement carefully. If in doubt about the terms, talk to an attorney.
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In another similar lease situation, rather than have the deal fall through, the sellers renegotiated the purchase agreement. They paid two months of the buyers’ remaining rent and upped the price to cover the third one. It was a slow market, and the sellers felt that giving the buyers a concession would be cheaper than putting their home back on the market. Luckily, these sellers took a pragmatic approach to getting their home sold. To avoid this problem, don’t sign a year or six-month lease and then start house hunting. Sellers are usually reluctant to take their home off the market for more than 30 days. When you’re seriously ready to buy and your lease is ready to expire, see if your landlord will extend on a month-to-month arrangement with a 30-day notice.
Mistake 2. Buying a Home Before You’ve Sold Your Current One If you own a home and want to move up, signing a purchase contract can be risky and cost you big bucks if your present home is not sold. Too many homeowners who want to move up write an offer or sign a construction contract before putting their home on the market. Sometimes, these homeowners feel their home will sell quickly because it’s the nicest one in the neighborhood, or they don’t stop to consider what the consequences will be if their home doesn’t sell. These mindsets can have the following consequences: 1. It can be expensive if you sign a construction contract and want
to wait two or three months to sell so that you don’t have a double move. You might find that the market has changed, your home may not sell, and you could end up in a squeeze play. You discount the house to sell and then find the money you planned on for your new home is much less. 2. Your home doesn’t sell and you end up renting it or working
out a creative financing deal with risky buyers. Usually, these pressure cooker deals have a 90 percent chance of ending up in default. 3. You make an offer subject to your home being sold. If the sell-
ers are on the ball, they will require a clause that if a buyer comes along, you have three days or less to perform. If you can’t, the offer is void and your time and energy are for nothing.
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Sometimes, the timing will work out and you can pull it off. People win the lottery, too. But for most homebuyers, the risks outweigh the rewards. Robert and Andrea found this out when they waited until their new home was 60 days from completion before they put their old home on the market. They hoped to sell and move into their new home and avoid a double move. Unfortunately, their old home needed some work to make it saleable, and Robert and Andrea weren’t willing to put time or money into it because they were focused on their new home. When their new home was finished and ready to close, the old home hadn’t sold or even had an offer. So they refinanced it for the maximum possible to get money to close on the new home. Without any other options, they rented out the old house to cover the payment. After a year, the rental is still costing Robert and Andrea about $210 a month because the rent doesn’t cover the mortgage payment. The home is going downhill fast because there’s no money or desire to do the deferred maintenance, and the loan is about $20,000 more than current market value. The best way to avoid this kind of situation is to sell your home first. Put everything you don’t immediately need into storage and rent an apartment or stay with relatives until your new home is finished or you find your dream home. In a hot seller’s market, you may not have to worry about timing as much, but in a normal or slow market, you’ll need to get your ducks in a row before you make your move.
Mistake 3. Not Getting a Preapproval Letter A branch manager at First American Title Company recently estimated that about 30 percent of the transactions at her branch fall apart or get delayed before closing. The biggest reason is that buyers don’t have their financial ducks in a row before they make an offer. Sometimes this results in lost time and embarrassment; other times earnest money is forfeited, too. You can solve this problem by contacting a mortgage lender before you start looking at homes. Go through the complete preapproval process and get a letter from your mortgage lender stating you’re good to go for a certain dollar amount. This preapproval letter gives you the following advantages: 1. You’ll know exactly how much home you can afford, how much
down payment you’ll need, and what your closing costs will be.
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2. You won’t waste your time looking at homes not in your price
range. 3. When you do find the home of your dreams, you’ll be able to
make a strong bird-in-the-hand offer that sellers will find harder to counter. When Ryan and Brittany felt they were ready to buy their first home, they met with a lender recommended by their buyer’s agent. After a credit check and verification of their employment and source of down payment, the lender issued a preapproval letter. The next step was house hunting, and after a couple of weeks, Ryan and Brittany found their dream home. When their agent called to arrange a time to present the offer, she was told there was a competing offer the sellers would also be considering. Both offers were presented to the sellers, and the competing offer was $1,500 higher than Ryan and Brittany’s offer. Their agent, a real pro, pointed out to the sellers that her clients were loan approved and gave them the letter from the mortgage company. She noted that her clients’ offer was a bird-in-the-hand, that they could close in three weeks or less, subject only to the appraisal. The competing buyers’ agent had not gotten his clients preapproved, and their offer was subject to mortgage approval. The sellers chose to go with the preapproved offer over a $1,500 higher but riskier offer. Obviously, they didn’t want to take their home off the market and wait a week or two to find out if the buyers qualified. Timing and a sure-thing approach will often win out over a higher offer.
Mistake 4. Not Having an Exit Strategy Many younger first-time homebuyers purchase one-bedroom condos, small two-bedroom homes, and PUDs. They don’t stop to think that in a few years their home will become too small when kids come along and/or their income increases. Too often, these smaller properties are hard to sell and accumulate less equity than homes with two or more bedrooms will. Nick found this out when he bought a one-bedroom condo after he got his first job right out of college. Hearing that it’s better to own than rent, he visited a new condo project. Smitten by the amenities and lifestyle image the development offered, he bought one and lived there for two years.
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After meeting his one and only, Nick got married and the couple lived in the condo for two more years; when a baby came along, suddenly, the one-bedroom became a tight fit. A bigger home soon rose to the top of their priority list and they started looking. There were some nice homes they could afford, but they would have to sell the condo first. So Nick talked to a realtor and found out that because quite a few units were for sale, getting a buyer was going to be a slow process. To sell the condo, he would probably have to discount it close to what he owed because other owners had dropped their prices to rock bottom. The condo has been on the market a year now, and there haven’t been any offers. Nick is seriously considering renting it out if he doesn’t get an offer in another couple of months. As Nick learned the hard way, before you buy property, think about how long you intend to live there. Remember that the average homebuyer stays in the home about six years. So it’s important to do some what-if thinking before you commit.
Mistake 5. Not Checking Out the Neighborhood First-time and experienced homebuyers sometimes fall into this trap. They see a house that pulls the right strings and pushes the right emotional buttons, and they buy. Overlooked is the neighborhood. Questions that should be asked but often aren’t include, ‘‘Are there gangs?’’ ‘‘Is there a neighborhood crime watch group?’’ ‘‘What is the age makeup?’’ ‘‘Is it a transient neighborhood with a high turnover?’’ ‘‘How are the schools, and is the home on a busy street?’’ No matter how much you like your house, if the neighborhood doesn’t fit your lifestyle, you’ll be selling before too long. Juan and Rita found this out when they bought a cute, renovated bungalow in an older neighborhood. They soon found out that their neighborhood had several teens who liked to race up and down the street, and three of the homes on their street were rentals. The yards were not being taken care of, and obviously the area was going downhill. Unfortunately, Juan and Rita were not using a realtor when they bought the house. They had driven by the home and noticed a ‘‘for sale by owner’’ sign. The sellers were an older couple who wanted to move to a warmer climate and offered them a good deal on the home. The buyers were so focused on the home that they didn’t even think about the area.
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To avoid making this mistake, spend a lot of time in the neighborhood before you buy. Check out the different ways you can get to the house you’re interested in. How close are shopping, schools, and other areas of interest? And finally, how quiet is the neighborhood at different times and on weekdays as well as on the weekend?
Mistake 6. Buying the Wrong Type of House How you can buy the wrong type of house seems hard to imagine, but it’s a major reason many homeowners move. For instance, you love the picturesque look of two-story homes but find having a family room in the basement is not what you want. A ranch with an open floor plan is more what you really desire for family togetherness. Or you buy a home with the laundry room in the basement, and after awhile you find going up and down the stairs is a real pain. You need to look at how the house will function for your family. How do you really live? Do you really need a formal dining room and living room? Would you be happier with an eat-in kitchen and a great room and a den to use as a home office? The house only needs to fit one family—yours. Sam and Becky made this mistake when they found a charming two-story house in a great neighborhood near Sam’s work. They were renting a home but wanted a place of their own. They made an appointment to see the home and immediately fell in love with the oak trim and crown molding, as well as the formal dining room and updated kitchen. The next weekend they took their three boys ages 5, 9, and 12 through the home. The kids loved the backyard with the big sycamores, but understandably they were not too happy to leave their neighborhood and school. But it was summer, so changing schools was not a problem. An offer was made and accepted. Thirty days later the loan closed and Sam, Becky, and kids moved into their own home. They were excited and the first couple of weeks were fun. But then, the time came to register the kids for school, and Becky found out the school was two miles away, which meant the kids would have to ride the bus. She also found out that there were no families in the neighborhood with elementary school age kids for a possible car pool. It was a middleaged neighborhood that they soon found out they had little in common with. It wasn’t long before Becky also realized that the formal floor plan
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of the two-story wasn’t kid friendly. They wanted to be near the kitchen where mom was, not downstairs in the family room or in the upstairs bedrooms. About a year later Sam and Becky put the home up for sale and started house hunting again. This time they were determined to be a little wiser and do some homework before they jumped at a home with enticing curb appeal. It’s important to put some thought into what your family lifestyle is and make a list of important things you want in a home. Don’t be swayed by a cute restored bungalow just like the one you grew up in, if a bilevel fits your family better. Every once in awhile take a deep breath and do a reality check when you’re out house shopping. Try to project what your needs will be in five to ten years from now. And don’t let awesome curb appeal sway you if the floor plan doesn’t fit your needs.
Mistake 7. Buying a Home on Impulse Too many new homebuyers and existing homeowners fall into the trap of going through a model home in a new subdivision, and the next thing they know they’ve committed to buy. You need to look at several new home projects and 10 to 20 existing homes before you get serious. New homes are professionally decorated and carefully arranged to push your emotional buttons. Existing homes are sometimes spruced up or staged to do the same thing. Resist the temptation to buy before you look around and know what’s available in your area. If you’re living in a one-bedroom apartment, anything over 900 square feet can look spacious. The impulse to grab the first home that tugs on an emotional string or two is strong. If it’s a new construction, check out the builder’s reputation. Talk to three or four people who bought from that builder and listen to what they have to say. This is also a great way to see what your neighbors would be like. Mike and Linda were seriously considering buying a home in a new subdivision. They loved the style and floor plan of the models and had even talked to the builder’s lender. But before they committed, they decided to check with several homeowners on one of the first streets built in the subdivision. They learned there were some unresolved drainage problems and that several homebuyers were considering legal action. Also, many of
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the callbacks took several weeks to resolve, and then only after repeated calls. It didn’t take long to realize that the builder didn’t have too good a reputation, and further checking revealed he had declared bankruptcy less than a year ago. That was enough for Mike and Linda to write that project off their list and move on. Luckily they did, because that development was featured on a local news channel a couple of months later for the problems the homeowners were having with the builder and developer.
Mistake 8. Buying a Property That’s Hard to Sell This is one the biggest mistakes homebuyers make. It happens so often that you wonder what buyers are thinking when they sign the purchase agreement. The most common reason given by these homebuyers for why they bought a certain property is that it was such a good deal. It was the biggest house they could find for the price. Typical hard-to-sell properties are: Homes that back up to railroad tracks, freeways, industrial areas, frontage roads, etc. Homes that have been overimproved for the area. A typical example would be a 900-square-foot bungalow with an addition on the back or side. Sometimes it’s a well-planned addition that blends in; other times it’s a tacky add-on. Neighborhoods that have become run down with a high percentage of rentals or foreclosed properties. Homes that stray too far from the architectural mainstream of what people are buying. Typical examples are round homes, earth-covered homes, and conversions from other buildings, such as barns, silos, and sheds. They can be quaint and even be featured in a home magazine, but selling and getting back the money invested in them is not always easy. Properties that have lot or landscaping problems. Examples are a steep slope for a backyard or a gully; little or no backyard; or no privacy from neighbors. The way a house sits on a lot can also affect value. And of course the most common problem is exterior and interior colors that don’t complement or fit the house. You may
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love bright blue, but if you paint your house that color, you’ve just reduced its value considerably. One instance of a homeowner making a property impossible to sell involved a buyer who spent $30,000 adding on to a small (800square-foot) 40-year-old house. It was done professionally and did blend in. Still, the end result was an older house with an add-on. In this case, the most it would add to the house’s value was around $10,000. Unfortunately, the owners had taken out a second mortgage to do the addition, and now they couldn’t sell the home for anywhere near what they owed. For them the worst case was that they would have to stay in the home for a few years until they paid down the loan. It could get ugly if they had to move because of a job transfer in the next few years. Another common reason buyers give for purchasing these properties is that they can fix them up or correct the problems. That may be so, but by the time they add up the costs and time, it would have been much cheaper to buy a better house or a better location. When you look at a property and see a negative but feel other features may outweigh the problems, especially price, slow down and think it through. There are red flags waving.
Mistake 9. Overextending Your Budget A lender who prequalified you for a loan may tell you that you’re able to buy a $150,000 house. But keep in mind that buying for the full amount you can qualify for may put you out of your comfort zone. It’s not uncommon for homebuyers to purchase the max they’re qualified for and not have the cash flow to decorate or put in the yard for a few years. Some homeowners can handle this, while others are frustrated by having no furniture or a dirt yard. For most people it works out better to go for a smaller house and be able to put in a yard or redecorate. Now that qualifying ratios are more credit driven than in the past, lenders are approving debt ratios as high as 65 percent. That means that your house payment and all other debts equal 65 percent of your income. Some families can handle that kind of debt load, while others would go bankrupt fast. It’s up to you to look at your lifestyle and realistically determine what you can handle. However, there’s another way to look at the amount of home you can buy. Some people claim you should buy the most home you possi-
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bly can now. As your income goes up and home values rise, you win. You not only save a move but end up with more equity and a home you’ll enjoy more. This approach worked for many owners who bought in the last 30 years and have watched their homes’ value soar dramatically. Many of these homeowners say they struggled in the beginning, but as their incomes went up, the house payments took a smaller part of their paycheck. Fred and Rhonda were among those homeowners who bought their home in 1979 for $32,000 and recently sold it $196,000. According to Fred, their house payment in the beginning took nearly a third of his income. By the time they sold it, it was nearly paid off and took less than 10 percent of his paycheck. Neither way is right or wrong. It just depends on your values and priorities.
Mistake 10. Not Protecting Yourself When You Make an Offer Many homebuyers, in the excitement of finding their dream home and writing up an offer, forget to add contingencies that will protect them. A contingency is a clause that is added to an offer to make it subject to a certain event. Common contingencies are financing approval, house inspection, closing on a certain date, and replacing a roof. It’s true that some contingencies will weaken your offer, such as selling your house first or adding a list of repairs. But there are others that you need to add to protect yourself. For instance, one buyer’s agent insisted on putting in a ‘‘subject to final loan approval contingency’’ in her client’s offer, even though he was approved for a mortgage. Unfortunately, two days before closing, the buyer was laid off his job due to downsizing, eliminating any chance of final loan approval. His agent saved him from losing a $1,000 deposit. The most critical clauses you should consider adding are: Always make your offer subject to a professional inspection. If you find problems, then you have some leverage to fix them or walk away and get your deposit back. Making your offer subject to final loan approval will protect you from something unforeseen. For instance, should you get laid
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off during the loan process, you’ll lose the chance to buy the house but not your deposit. If you’ve made an offer on a new home and your old home hasn’t closed yet, add a clause making it subject to closing the old house and funding. You want the offer subject to the home appraising for at least the sales price. If the appraisal comes in low, you’ll have the option of negotiating the lower price or walking away. Along with final loan approval, inspection contingencies are the most important protection for a homebuyer. In one particular case, a home inspector found a cracked combustion chamber in the gas furnace. This can allow carbon monoxide to escape into the house with lethal consequences. The sellers quickly had the furnace replaced and the deal closed. Luckily, a potentially serious accident was avoided. In another case, an inspector found problems with the wiring. It was not only old, but the owner had tried to cut costs and do some rewiring himself. The wiring was not only not up to code but was dangerous, with illegal splices and unconnected hot wires in the attic. In this case the buyers simply negated the offer and got their deposit back because it was subject to a satisfactory inspection.
Mistake 11. Getting Family, Relatives, and Friends Too Involved Not involving family or friends can sometimes be difficult. If mom and dad are putting up the down payment or cosigning on the mortgage, then they’ll be a big part of the deal. Otherwise, getting too many opinions can be worse than no opinions at all. Often, those whose opinions you seek will see your enthusiasm and support your decision, even if it’s a bad one. Or people who don’t know what they’re talking about will point out problems and bad mouth a good home. Greg and Linda found this out when they bought their first home. Naturally, they were excited and wanted to get as many friends and relatives involved as they could. Unfortunately, it didn’t work out quite as they hoped. The more friends they took through the home, the more confused they got. Some friends loved it, others didn’t. One uncle even told them they were making a big mistake by moving into that neighborhood.
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After a week of getting bombarded by mixed messages, Greg and Linda developed such a bad case of buyer’s remorse that they called their agent and told him they were backing out. They couldn’t stand the pressure and would gladly forfeit their $500 deposit. So how do you avoid this situation? First, rely on your agent, who is a professional and knows the areas and pitfalls. Second, trust your own research. You’ve undoubtedly looked at a dozen or so homes in your price range, so you should have a pretty good idea of values and neighborhoods by the time you’re ready to make a decision. Third, when you find a home you want to make an offer on, the last thing you want to do is involve Uncle Louie or Cousin Joe, who happens to be a contractor. Now matter how good they are, builders or contractors are not professional home inspectors. They may be skilled in their particular trade, but they’re not trained to find the potential problems a professional home inspector is. Don’t make the mistake of trying to save a few hundred dollars by short cutting the inspection process. Having anyone other than a professional inspect the house and give you a written report can come back to haunt you. Going back to the seller with a written report from a pro that the roof needs to be replaced carries some weight. Going back and telling the sellers that Uncle Louie says you have a bad roof doesn’t quite cut it. The bottom line is to go with the advice of your buyer’s agent and home inspector; they’re the pros who can help you the most. If you want to involve family, relatives, and friends, have a barbecue at your new house after they help you move in.
Mistake 12. Not Being Able to Make a Decision When you’re searching for the right house, you should take your time and look at as many homes as you need to in order to get a good feel for the market. Once you’ve narrowed down your choices and decided on your dream home, then it’s time to move swiftly. Many first-time homebuyers lose a house or two they like before they realize that they have to move quickly. Indecision can cost them the home of their dreams. Todd and Alex found this out when they were looking for their first home. After going through more than two dozen houses and not
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seeing anything that they liked, they were getting a little discouraged when their realtor called about a home that had just come on the market. When Todd and Alex drove by, it was the home they were looking for, an updated two-bedroom cottage with newly painted yellow siding, full basement, and a detached double car garage. It had been on the market less than a day. Their agent wanted them to put together an offer immediately, because he didn’t think it would be on the market long. But, as much as they wanted the home, Todd and Alex hesitated. They were scared to make a commitment and wanted to wait until the weekend when their parents could go through it. Unfortunately for them, the weekend walk-through never happened. Another couple also loved the home, made an offer, and the ‘‘for sale’’ sign got a bright red diagonal ‘‘sold’’ sticker. If you like the home, chances are other buyers will also. It’s not uncommon for a home to sit on the market for weeks with no action, and then suddenly two or three offers come in at the same time. Fear of making a mistake is usually the culprit. The best way to work through this is to talk it over with your broker, lender, or someone who has bought a house before. Once you get it out in the open, it becomes easier to deal with. Buyer’s remorse is the industry term for this fear, and it applies to not only buying a house but also a new car, appliance, engagement ring, or whatever. Most homebuyers get it somewhere along the way. Knowing that’s it out there lurking and will probably strike when you least expect it should make it easier to deal with when it grabs you.
Mistake 13. Not Getting a Buyer’s Broker Early On A good buyer’s broker on your side is the best thing you can do to find the home you’re looking for and get the best deal. These agents know the market, the best neighborhoods, and what type of loan will best fit your situation. You’ll save a lot of wheel spinning if you get an agent in the beginning. The best part is that the fee is typically paid by the sellers, who are glad to pay it to get their home sold to a qualified buyer. Max and Andrea were first-time homebuyers who had been looking for three months and were getting frustrated. Every weekend they circled ads, toured open houses, and called on for-sale signs. The bewildering array of choices only added to the confusion. Finally, one of
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Andrea’s coworkers suggested they talk to Carol, an agent she knew through her school’s PTA. The first thing Carol did when she met with Max and Andrea was to ask them if they were working with a mortgage lender. When they said no, she told them that step number one in buying a home was to find out what you could afford. She then arranged for them to meet with a mortgage lender to get the process started. A couple of hours later, the lender called Carol and told her that Max and Andrea looked pretty good. There were a couple of small credit problems he had to clear up, but that shouldn’t be too difficult, and they could go up to about $150,000. Meeting with the buyers again, Carol quickly determined what type of home, the number of bedrooms and amenities they wanted, along with areas within a reasonable commuting distance of work. The next step was entering the information into the multiple-listing database. Since this database is updated continuously, Carol limited the search to homes that had come on the market in the last two weeks. She knew that the best homes don’t last too long, so those are the ones you want to look for first. If the first list doesn’t produce a winner, the search is extended back to, say 30–60 days and so on. The longer a home has been on the market, the greater the chances are that it’s either overpriced or a dump where the buffalo roam. In the first search, Carol pulled up 14 homes that fit the buyers’ criteria, and the search was on. The first eight homes they looked at over the next two days were nice, but didn’t quite fit. On the third day of looking, however, the tenth home on the list turned out to be a winner. It was what the buyers were looking for. Max and Andrea quickly made an offer and Carol presented it to the sellers that evening. It was accepted with a closing scheduled in three weeks. It’s true you can find a home on your own, but why spin your wheels and go through the hassle when you can have the services of a professional who will make sure you make the right moves? So, how do you find a good broker? Ask other people you know who have bought homes if they can recommend a good agent. Excellent sources are mortgage lenders and title people. They know who are bringing in the deals and how good a job they’re doing for their clients. Once you find a good realtor, it’s in your best interests to work with her on an exclusive basis. You may be asked to sign a Buyer’s Agency Agreement. If you specify that it can be canceled by either party, you’ll have a way out if you find you can’t work with that agent.
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Working with several agents at the same time is usually not as productive. None of them are likely to consider you a serious client whom they are willing to spend time on searching out the best homes. To find your dream home you’ll want an agent who will stay on top of the best buys as they pop on the market. And you’ll want an agent who will check out a new listing to see if it’s what you’re looking for, and if it does, call you to see it.
Mistake 14. Not Getting a Professional Home Inspection Steve and Tiffany were so excited to find the charming brick bungalow on a tree-lined street. It was in an area they had been looking at for several months and it had just come on the market that morning. Their enthusiasm was high as they went through the home, noting all the wood trim and spacious floor plan of a 1940s bungalow. It was exactly what they were looking for. A home where they could strip off the layers of paint and wallpaper and restore its former charm. Since Steve and Tiffany could come up with a 20 percent down payment, they opted to finance conventionally to avoid PMI costs. The deal closed three weeks later and two happy buyers moved in ready to start their renovation project. It didn’t take long before the new homeowners discovered the problems. The gas company tagged the furnace because the service tech suspected it had a cracked chamber and the vent pipe was too near a wood joist. Other problems, typical of older homes that haven’t been upgraded, added up. Unfortunately, the buyers had spent most of their money buying the home and didn’t have funds for the major problems they encountered. Interestingly, Steve and Tiffany felt that the bank’s appraiser would find any problems and list them on the appraisal. In reality, an appraiser is interested only in the overall value of the home as compared to others recently sold in the neighborhood. The appraiser’s job is to ensure the home is worth what the bank loans on it. So what should Steve and Tiffany have done differently? First, they should have hired a profession inspector. The inspection report would have outlined exactly what problems lurked under the rafters, joists, and in the dark spots of the basement. The buyers will know the condition of the appliances, furnace, water heater, and plumbing.
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The buyers will have a list of problems and about how much it will cost to fix them. They’ll go into the sale with both eyes open and won’t have to max out their credit cards on unforeseen repairs.
Mistake 15. Not Checking Out the Homeowners Association First In most states, homeowner associations (HOAs) have broad powers to enforce the rules and collect fees and assessments. If you don’t follow the rules or pay your monthly fees, they can put a lien on your property and ultimately foreclose. Having a strong HOA is a double-edged sword. Strict rules can keep the project looking uniform and inviting, thus maintaining its value. The opposite edge is that you may not like the rules, and changing them is not always easy. To change HOA rules usually entails getting like-minded people together and electing a new board. If you can get a majority of the homeowners to go along with your proposals, great. If not, you can try again next election. So you don’t end up in a project with rules you don’t like, get a copy from the association secretary and read them over carefully. Also find out what other rules have been proposed but not yet voted on. This will give you a feel for what direction the homeowners in the project are headed.
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Getting the Most Out of the Fifteen Mistakes Checklist The purpose of this book has been to give you the tools to get the best deal and avoid the pitfalls so many homebuyers fall into. The following checklist is a tool you can keep handy and refer to often to make sure your home-buying experience becomes a good memory. Mistake
Solution
#1. Not planning your move
Read your lease to find out when it expires. Contact your landlord and see if you can rent on a month-tomonth basis after it expires. Line up relatives or somewhere you can stay if your move-out, closing, and movein times don’t mesh. If you’re selling a home and buying another, line up move in dates or arrange for a rent back if possible. See Chapter 5 for more suggestions.
#2. Buying a home before selling your present one
If it’s a slow market, it may be better to get an offer on your present home before making one on another home. If you’re building, don’t wait until the last month or two to put your home on the market, hoping to avoid two moves.
#3. Not getting a preapproval letter
You need to know exactly home much home you can afford before you start looking. Spinning your wheels looking at homes outside your price range can be frustrating. See Chapter 3 on how to get prequalified.
#4. Not having an exit strategy
The best time to think about selling your home is when you buy it. New condo projects and subdivisions can become a trap you if you don’t do your homework. See Chapter 5.
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#5. Not checking out the neighborhood
Walk through the neighborhood before you make an offer. If you have children, check out the age ranges of the kids in the neighborhood. Also research the area for planned road or zoning changes.
#6. Buying the wrong type of house
Look at your lifestyle. What type of home will work best? How long will this type of home work for you? Fill out the worksheet at the end of Chapter 4.
#7. Buying a home on impulse
Don’t fall for a sales pitch at a new subdivision or from an agent who tells you to buy now or lose. Do your homework before you sign. See Chapters 5 and 6 for shopping tips.
#8. Buying a property that’s hard to sell
Before you write up an offer on a good deal, check out the area. Getting a good deal on a home in a notso-good area will come back to haunt you. Go for the best area you can afford. See Chapters 4 and 5 for shopping tips.
#9. Overextending your budget
Lenders often qualify you for more house payment than you can comfortably handle. Factor in taxes and insurance. If it’s a condo or co-op, factor in the fees. Look at your situation and set a limit. It’s no fun to buy a home and become a slave to the payments.
#10. Not protecting yourself when you make an offer
Make your offer subject to final mortgage approval and a home inspection. See Chapter 5 for more tips.
#11. Getting family and friends involved
Be wary of well-intentioned but uninformed opinions. Family and friends mean well, but they’re not professionals. For value opinions look to a professional appraiser. For an opinion on the condition of a home, look to a professional home inspector.
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#12. Not being able to make a decision
Many people lose the home of their dreams because they can’t make a decision. Line up your ducks and when you find the home you want, go for it. If you like it, chances are others will too. See chapter 5 for tips on moving quickly on your dream home.
#13. Not getting a buyer’s broker early on
You don’t have to spin your wheels without professional help. The seller usually pays the broker’s fee. See Chapter 4 for tips on finding a broker.
#14. Not getting a professional home inspection
Getting a home inspection is so important that you never want to buy a home without one. Even professionals in the real estate industry and builders don’t have the training of a professional inspector. It’s one of those investments that can save you thousands of dollars. See Chapter 5.
#15. Not checking out the homeowners association before you buy
Get a copy of the rules from the association before you commit. Talk to others in the project about the direction the HOA is going in the future.
Appendix A: Shopping Comparison Checklist Home Comparison Checklist (Give each item a score between 1 and 5, with 5 being the best. The house with the highest total is the best home for you)
Item
House 1
House 2
Overall location Location in the neighborhood Value compared to neighbors If the home has curb appeal Home lifestyle compatibility Age of home/date of remodel Total square feet Overall kitchen Kitchen appliances Bedrooms Family room Yard/landscaping
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House 3
House 4
House 5
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Appendix A: Shopping Comparison Checklist
Item
House 1
Garage/carport RV parking Roof condition and age Overall home condition Resale potential Total score Other Decision-Making Information Sales price Price you would offer Total cost of changes/ upgrades Buyer concessions Homeowners Association fees
House 2
House 3
House 4
House 5
Appendix B: Step-by-Step Checklist to Owning Your Dream Home Decide that you’re sick and tired of renting and paying off your landlord’s mortgage. Talk to friends, coworkers, realtors, etc., and put together a list of mortgage lenders they’ve had good experiences with. Talk to the lenders on your list and narrow it down to the three you feel most comfortable with. (Keep the other names and phone numbers; you may need them later) Call your first choice lender and go through the qualification process. You’ll need to pay for a credit check and sign a few forms. Also, get a prequalification letter stating how much house you can buy. Fill out the Home Shopping Checklist in Chapter 4 and crystallize your thinking as to what you want in a home. Talk to at least three realtors and pick one who is experienced and familiar with the area and price range you’ll be looking in. Make sure your agent has good listening skills and will work to find you the home you want, not what the agent wants you to buy (see Chapter 4). Have your agent put together a list of homes in the areas and price range you’re interested in. Start out about $5,000 under and over your prequalified loan amount plus down payment. For example,
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Appendix B: Checklist to Owning Your Dream Home
if you qualify for a $150,000 loan and have a $15,000 down payment, you’ll look at homes priced from $160,000 to $170,000. Go over the list of homes with your agent and eliminate those on busy streets, in bad areas, and with obvious problems. The pared down list contains the homes you’ll go through and inspect. See Chapter 4 for tips on home shopping. Take along the Home Comparison Checklist (Appendix A) and fill it out as you go through the homes on your list. Also take your digital camera along and snap pictures of what’s included like blinds, chandeliers, appliances, and fixtures. Once you decide on your dream home, your agent will fill out a purchase agreement and you’ll need to write an earnest money check. There’s no set amount for earnest money, but you’ll want it to be big enough so that the sellers know you’re serious. Your agent will guide you on the area norms. Make sure your offer is subject to a final loan approval and a professional home inspection. See Chapter 5 for tips about home inspectors, putting your offer together, and presenting it to the sellers. If your offer is accepted, hire a home inspector (see Chapter 5) and go with her to inspect the house if possible. If the home inspection report shows no serious problems or problems you can live with, continue on toward closing. However, if there are serious problems, then your agent will want to write an addendum addressing them. This will require the sellers to make good the specific problems you list. If they refuse to do the repairs or adjust the price, you’re back to the shopping mode. Once your offer is accepted, fax a copy to the mortgage lender who prequalified you and have the lender work up a Good Faith Estimate (see Chapter 3). Also, contact the other two lenders and ask them for Good Faith Estimates on the same sales price. Spread the Good Faith Estimates out side by side and compare the loan costs. If your first choice lender is not giving you the best deal, give the lender a chance to meet the best quote. If the lender refuses or gives you a lot of double talk, walk the loan to the lender with the best quote.
Appendix B: Checklist to Owning Your Dream Home
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Your mortgage lender will ask you to have your insurance agent fax or mail a homeowner’s policy binder. See Chapter 7 on how to shop for the best deal. A day or two before you close, do a walk-through inspection and make sure what you included in the offer is still there. Take along your photos and seller’s disclosure forms if they are used in your area. Have the title company or whoever does your closing fax or e-mail you a copy of your closing statements (HUDs). Compare the costs on the HUDs to the costs on your Good Faith Estimate. If they match, the next step is closing. If they don’t, call your loan officer and get the changes made before you proceed to close. Move in and enjoy your home until the next time.
Appendix C: Step-by-Step Checklist to Buying a Condo or Co-op Decide that you’re sick and tired of renting and paying off your landlord’s mortgage. Talk to friends, coworkers, realtors, etc., and put together a list of mortgage lenders they’ve had good experiences with. Talk to the lenders on your list and narrow it down to the three you feel most comfortable with. (Keep the other names and phone numbers; you may need them later) Call your first choice lender and go through the qualification process. You’ll need to pay for a credit check and sign a few forms. Also, get a prequalification letter stating how much condo you can buy. Fill out the Home Shopping Checklist in Chapter 4 and crystallize your thinking as to what you want in a condo or co-op. Talk to at least three realtors and pick one who is experienced and familiar with the area, price range, and developments you’ll be looking in. Make sure your agent has good listening skills and will work to find you the home you want, not what the agent wants you to buy (see Chapter 4). Have your agent put together a list of condos in the areas and price range you’re interested in. Start out about $5,000 under and over your prequalified loan amount plus down payment. For example,
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Appendix C: Checklist to Buying a Condo or Co-op
225
if you qualify for a $150,000 loan (including HOA fees) and have a $15,000 down payment, you’ll look at units priced from $160,000 to $170,000. Go over the list of condos or co-ops with your agent and eliminate those in bad areas and with obvious problems. The pared down list contains the units you’ll go through and inspect. See Chapter 6 for tips on condo shopping. Take along the Home Comparison Checklist (Appendix A) and fill it out as you go through the homes on your list. Also take your digital camera along and snap pictures of what’s included like blinds, chandeliers, appliances, and fixtures. Get a copy of the rules and bylaws of projects you’re interested in. Once you decide on a unit, get copies of the financial statement and recent minutes of the Homeowners Association (HOA). Find out how fast HOA fees are going up and if there are expenses coming up that are not covered by reserves. Walk around the neighborhood and talk to a few owners about HOA rules. Pay careful attention to soundproofing. Can you hear the neighbors through the walls? Once you decide on a unit, your agent will fill out a purchase agreement and you’ll need to write an earnest money check. There’s no set amount for earnest money, but you’ll want it to be big enough so that the sellers know you’re serious. Your agent will guide you on the area norms. Make sure your offer is subject to a final loan approval and a professional home inspection. See Chapter 5 for tips about home inspectors, putting your offer together, and presenting it to the sellers. If your offer is accepted, hire a home inspector (see Chapter 5) and go with him or her to inspect the condo if possible. If the home inspection report shows no serious problems or problems you can live with, continue on toward closing. However, if there are serious problems, then your agent will want to write an addendum addressing them. This will require the sellers to make
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Appendix C: Checklist to Buying a Condo or Co-op
good the specific problems you list. If they refuse to do the repairs or adjust the price, you’re back to the shopping mode. Once your offer is accepted, fax a copy to the mortgage lender who prequalified you and have the lender work up a Good Faith Estimate (see Chapter 3). Also, contact the other two lenders and ask them for Good Faith Estimates on the same sales price. Spread the Good Faith Estimates out side by side and compare the loan costs. If your first choice lender is not giving you the best deal, give the lender a chance to meet the best quote. If the lender refuses or gives you a lot of double talk, walk the loan to the lender with the best quote. A day or two before you close, do a walk-through inspection and make sure what you included in the offer is still there. Take along your photos and seller’s disclosure forms if they are used in your area. Have the title company or whoever does your closing fax or e-mail you a copy of your closing statements (HUDs). Compare the costs on the HUDs to the costs on your Good Faith Estimate. If they match, the next step is closing. If they don’t, call your loan officer and get the changes made before you go proceed to close. Move in and enjoy the unit until the next time.
Appendix D: Checklist of What Your Mortgage Lender Needs to Get Started
Full name as printed on birth certificate. Copy of Social Security card and drivers license. Current address, along with name and address of landlord. If less than two years, you’ll need name and address of previous landlord. Printout from your landlord showing rent amount and payment history. Your last pay stub that shows year-to-date earnings. If you have consistent overtime at work and need it for qualifying, get a statement from your employer verifying that it will continue. List of checking and savings accounts with account numbers and balances. List of IRAs, CDs, stocks, bonds, and other paper assets. Breakdown of your debts, such as car loans, student loans, credit cards, and child support. Include name, address, account numbers, and balances. List of hard assets, such as cars, boats, RVs, and other real estate.
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Appendix D: What Your Mortgage Lender Needs
If you’re self-employed or on commission, you’ll need the past two years of signed tax returns, as well as a year-to-date profit-and-loss statement. If separated or divorced, include a copy of the divorce decree or separation agreement. You’ll need to document income from child support with a copy of the court clerk’s payment history or canceled checks for the past year.
Glossary Addendum. An addition or modification to a purchase agreement. Sometimes called a rider or amendment. Adjustable Rate Mortgage (ARM). A mortgage with a payment that goes up or down according to the performance of an economic index such as the one-year Treasury Bill. Payments can adjust every six months, one year, two years, etc., depending on the plan. The margin (stays constant) is added to the index rate to come up with the interest rate you’ll pay for the next adjustment period. Agency. The relationship between a buyer or seller and a real estate broker. Allowance. The amount of money a contractor allows for appliances, upgrades, or options. Amortization. When a loan’s monthly payments include principal and interest and will pay to zero in x number of years, it’s called an amortized loan. A printout that shows how much goes to principal and interest each month is an amortization schedule. Annual percentage rate (APR). The APR interest rate is calculated by adding the closing costs to the loan amount and recalculating keeping the payment and term the same. Application fees. Fees that you pay a lender up front for a credit report, appraisal, and sometimes for locking in an interest rate. Appraisal. The opinion of a licensed appraiser on what a property is worth in the current market. Appraisers are licensed in most states. Appreciation. When a home’s value increases. Balloon mortgage. A mortgage that typically has payments of a 30year mortgage, but with the full balance due much sooner, in 1, 5, or 10 years, for example.
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Glossary
Bid. A written proposal from a contractor to build a house according to the specifications you agree on for a certain price. Also, subcontractors can submit bids for certain parts of the construction. Building permit. A document issued by the city or county building department granting permission to build the house according to the specs you’ve submitted. Buy-down. Typically, a lender will give you a lower interest rate for a fee. For instance, 1 percent of the loan amount could buy down the interest rate 1/6 of 1 percent, depending on the market. Builders can advertise a lower interest because they’ve agreed to pay the lender for the buy-down. Buyer’s market. Market conditions that favor the buyer. There are more homes for sale than there are buyers. The opposite is a seller’s market. Callback. A return visit by the contractor to repair or replace items he has found to be unsatisfactory or that require service under the warranty. Cap. On a variable interest loan it’s the maximum rate a loan can go during the life of the loan. CC&R. Covenants, conditions, and restrictions are recorded rules that govern what you can and can’t do with your property. Change order. Written authorization for the contractor to make changes or additions to the original contract along with any additional costs incurred. Closing costs. Fees paid at closing to the lender. They typically total 3–4% of the loan amount. Closing statement. Also known as a settlement statement or HUD. Condominium. A dwelling of two or more units where the homeowners own the interior space of their unit but own everything else in common with the other owners. Conforming loan. One that meets with Fannie Mae or Freddie Mac underwriting standards. Conventional mortgage. A mortgage that is not insured by a government agency. Quasi-government corporations like Fannie Mae and Freddie Mac, as well as banks, pension funds, and investors, buy these loans as investments. Co-op building. An apartment building that is owned by a corporation that sells shares to people who want to lease an apartment. Owning shares entitles you to lease a certain apartment, and you pay a monthly assessment, which includes your share of operating costs and taxes.
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Cost-plus contract. You agree to pay the contractor the cost of materials and labor plus a certain percentage for profit and overhead. This is also known as a time and materials contract. Counteroffer. When you make a written offer on property, the sellers can accept, reject, or counter your offer with the price and/or terms they will agree to in writing. Sometimes, the counter, counteroffer process goes back and forth several times until the parties reach agreement. Curb appeal. The impression a house gives when a buyer drives by to assess the property. Depreciation. When a home’s value decreases. Desktop underwriting. Automated underwriting. Draw. A payment to the contractor at certain stages of construction to pay for work done to that point. The draw schedule should be outlined in the contract. Dual agency. This is when a real estate agent represents both the buyer and seller in a real estate transaction. Due on sale clause. Nearly every mortgage has a clause that requires the mortgage to be paid off when the home is sold without paying off the mortgage. Earnest money. When you make an offer, you give the sellers or their agent a deposit to show good faith so they’ll take the home off the market for a specified period of time. Easement. A right given by a landowner to a third party to make use of the land for a specific purpose. Typical easements are for utilities, sewers, water mains, or access to another property. Easements are recorded in the county recorder’s office. Encroachment. A neighbor’s fence, driveway, structure, or whatever encroaches on your lot. Many times the property owner doesn’t even realize it until a survey is completed. Equity. The difference between your mortgage balance and the current market value of your home. Fannie Mae. Federal National Mortgage Association. Freddie Mac. Federal Home Loan Mortgage Corporation. Ginnie Mae. Government National Mortgage Association. Good Faith Estimate. Lenders are required to give you in writing a breakdown of all your closing costs and loan fees along with an APR quote within 3 days of your application. Hazard insurance. Insurance that covers the property against damage and liability.
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Glossary
Home inspection. Usually refers to an inspection performed by a licensed home inspector. Homeowners association. A corporation formed to handle the affairs of a subdivision, condo, or PUD project. All the property owners are members of the association. Officers are elected by the members to enforce the rules, collect fees, and pay the bills. Home warranty. An insurance policy that insures electrical, plumbing, heating, and appliances in a home for one year. Also, a warranty the builder or a third party issues insuring new construction against defects. Index. On a variable rate loan, it’s the base interest rate the lender adds the margin rate to in order to calculate the interest you’ll pay for the next period. Late charge. A penalty applied to a mortgage payment that arrives after the 10- to 15-day grace period. A typical late charge is 4 percent of the payment. Lease with option to buy. A lease where the tenant has the right to buy the property for an agreed upon amount within a certain time period. Sometimes part of the monthly payment is applied to the purchase price if the tenant buys the property as agreed upon. Leverage. Using mostly borrowed money to buy a property. The buyers have from nothing to only small percentage of their own money in the deal. Lien. The legal claim that is recorded and attaches to property. Lien release. A document that voids the legal rights of the contractor, subcontractors, and suppliers to place a lien against your property. You should never close new construction until you have lien releases from all subcontractors and suppliers verifying they have been paid in full for labor and materials. Limited Agency Consent Agreement. The agent agrees in writing to represent both parties and not disclose anything that would hurt either party’s bargaining position. Loan commitment. A document that a mortgage provider gives you that states you have been approved for a loan at a certain interest for a certain length of time. It may also have conditions that you need to meet for final approval. A commitment is good for a limited time, usually 30–60 days. Loan origination fee. A one-time fee charged by the lender to do the loan. It’s usually .5 to 1 percent of the loan amount. Loan-to-value ratio (LTV). The percent the bank loans you to the value (sales price) of the home. If you borrow 80 percent or put
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20 percent down payment, the LTV would be 80 percent. A 10 percent down payment would give you a 90 percent LTV, and so on. Lock-in. The interest rate the bank offers and you agree to for a certain period of time, usually 30–60 days. Depending on the market, you may lock in a rate at the time of application; other times you may let it float hoping it will go down before closing. Maintenance fee. The monthly fee you pay to the homeowners association for taking care of the grounds, structures, or whatever else is included in the association agreement. Mechanic’s lien. A lien obtained by an unpaid subcontractor or supplier that attaches to your home. Legally, your home can be sold to pay the subcontractor or supplier. MLS. Realtor’s Multiple Listing Service. Mortgage broker. A person or company that brings together a lender and homebuyer and processes the mortgage application. Mortgagee. The entity that lends money secured by property (lender). Mortgagor. The one who borrows money secured by the property (borrower). Negative equity. A situation where you owe more on the house than it’s worth on the current market. Nonconforming loan. A loan that doesn’t meet with Fannie Mae or Freddie Mac underwriting standards. Option. A buyer pays a fee to tie up a property for an agreed on price and length of time. At the end of the time period, the buyer either performs or loses the option fee. Personal property. Property that is not attached to a dwelling and/or not included in the sale. Examples are refrigerators, furniture, and artwork. PITI. An acronym for principal, interest, taxes, and insurance when referring to a mortgage payment. Planned Unit Development (PUD). A community that has a homeowners association that handles common areas. PUDs are typically single-family homes or connected units with a private lot. Plans and specifications. Drawings for the project, along with a list of the products, materials, quantities, and finishes to be used in the project. Points. Each point equals 1 percent of the loan amount. Points are usually used to buy down an interest rate. What a point is worth can change daily in response to the financial market.
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Prepaid interest. Usually interest paid from the day of closing to the end of the month. Your first mortgage payment will then start on the first of the following month. This is so everyone’s mortgage payment is due on the first of the month, not a month from the day they close. Also see points. Prepayment penalty. A fee the mortgage company charges you to pay off a loan early. It can be a flat fee or a percentage of the loan amount. Prequalifying for a loan. A commitment from a bank that you qualify for a loan subject to certain conditions. Private mortgage insurance (PMI). An insurance premium you pay to protect the bank against default if your loan is more than 80 percent of the purchase price. PUD. See Planned Unit Development. Punch list. When the home is just about completed, you do a walk through with the contractor or foreman and make a list of problems and items to be fixed or completed. Preferably, these items will be completed before you close. Real estate owned (REO). Homes that lenders have foreclosed on and now own. Realtor. Someone who is a member of the National Association of Realtors and the appropriate state and local boards. Regulation Z. Also known at the Truth in Lending Act. It requires lenders to provide a written good faith estimate or a breakdown of the closing costs a buyer pays to get the loan. Reserve. Money set aside by a condo, co-op, or homeowners association for future improvements and repairs. RV. Recreational vehicle. Secondary market. The wholesale mortgage industry. Seller’s market. Market conditions that favor the seller, in which there are more homebuyers than homes for sale on the market. The opposite is a buyer’s market. Settlement statement. Also known as a closing statement or HUD. It’s a breakdown of all the costs and fees you pay to get a mortgage. Short sale. Lenders agreeing to take less than the balance owed on a mortgage so that they don’t have to foreclose. Subcontractor. A person or company hired by the contractor to perform specialized work such as framing, sheet rocking, plumbing, or electrical. Sometimes referred to as a trade contractor. Title company. A company that insures property against defects in the title. It may also close the loan and prepare closing documents.
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Title insurance. An insurance policy that insures your property against problems arising from defects in the title such as liens, forgeries, and easements. Town houses. Condominium units that are typically built side by side rather than as multistory units. Transaction brokerage. A transaction broker working with a consumer without establishing an agency relationship. Truth in Lending Act. See Regulation Z. Variable interest rate. A mortgage that has an interest rate that goes up or down according to the performance of a financial index. A popular index is the Treasury Bill Index. Warehousing the loan. Banks and other money sources buying or making mortgage loans for their own portfolios. Zoning. Local cities’ and counties’ laws that govern how land is used and what and where certain structures can be built. These laws are often called zoning ordinances.
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List of Additional Resources
Suggested Reading A. M. Watkins. Manufactured Houses, Finding and Buying Your Dream Home for Less. 1994. Chicago: Real Estate Education Co. Ilyce R. Glink. 100 Questions Every First-Time Home Buyer Should Ask. 2000. New York: Times Business. Jeff and Susan Treganowan. The Ultimate New-Home Buying Guide. 2001. North Conway, N.H., Maple Leaf Press. Kevin Burnside. Buying a Manufactured Home. 2002. Van der Plas Publications. Martha Webb and Sarah Parsons Zackheim. Dress Your House for Success. 1997. New York: Three Rivers Press. Martha Webb. Finding Home, Buying the House That’s Right for You. 1998. New York: Three Rivers Press. Myron E. Ferguson, Build It Right, What to Look for in Your New Home. 1997. Salem, OR: Home User Press. Randy Johnson. How to Find a Home and Get a Mortgage on the Internet. 2001. New York: John Wiley & Sons. Robert Irwin. Tips and Traps When Mortgage Hunting. 1992. New York: McGraw-Hill, Inc. Robert Irwin. Tips and Traps When Buying a Condo, Co-op, or Townhouse. 2000. New York: McGraw-Hill, Inc.
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Web Sites Home Shopping Sites www.Realtor.com www.homeadvisor.com www.HomeSeekers.com www.cyberhomes.com www.iOwn.com www.realestatebook.com www.revillage.com www.Owners.com www.homesdatabase.com www.homeroute.com.
Credit Scoring Sites www.myfico.com www.creditexpert.com www.Experian.com www.Equifax.com www.Transunion.com www.icreditreport.com www.mycreditfile.com www.identityguard.com
Financial Calculators www.hsh.com/hbcalc.html www.mortgage-minder.com/
Secondary mortgage markets www.fanniemae.com www.freddiemac.com www.ginniemae.com
List of Additional Resources
List of Additional Resources
Government Loan Programs www.hud.gov. www.rurdev.usda.gov www.va.gov.
State and Local Loan Programs www.hud.gov/local/index.cfm
Third-Party Gift Programs www.thebuyersfund.com www.getdownpayment.com
Internet Mortgage Lenders www.countrywide.com/purchase/l_loantypes.asp www.countrywide.com www.e-loan.com www.getsmart.com www.loanweb.com www.quickenloans.quicken.com www.wellsfargo.com
Home Inspectors www.ashi.com www.nibi.com www.inspecthomes.org www.iami.org/hif.cfm
Financial Calculators and Sonic Measuring Devices www.calculated.com www.newpronet.com www.zircon.com
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List of Additional Resources
Flood Insurance www.fema.gov/nfip
Title Insurance www.stewart.com www.firstam.com In Iowa: www.ifahome.com
Moving www.amconf.org www.movingadvocateam.com www.monstermoving.com www.homestore.com/move www.move.com www.moving.org
Garage Sales www.yardsalesupplies.com www.garagesaletools.com www.yardsailor.com www.gsonly.com www.insiderreports.com
Modular and Manufactured Homes www.modularcenter.com www.servicemagic.com www.skylinehomes.com www.silvercrest.com www.mobilehome.com www.factorybuilthousing.com www.mfg.org
Index addenda, 82–83, 97 additions, to homes, 207, 208 adjustable rate mortgages (ARM), 38–39 advertising for garage sales, 179–181 MLS (multiple-listing service), 29, 71–72, 76, 78, 89–90, 100, 157, 213 air-conditioning, 197 alimony, 51 American Moving and Storage Association (AMSA), 175 American Society of Home Inspectors (ASHI), 83, 106 amortization, 38 annual percentage rate (APR), 34–35 appliances, 96, 97, 167, 176 appraisal fees, 45, 56, 57 appraisals, 93, 94, 106–108 apartments in single-family homes and, 151 as contingencies, 203, 210 drive-by, 88 home inspections and, 214 insuring homes for value of, 140 in selling process, 170–171 appreciation, 7 articles of incorporation, 122 ‘‘as-is’’ purchases, 108 asking price, 170–171 attic apartments, 150 automated underwriting, 18, 19 average selling time, 171 balloon payments, 29, 40 bankruptcy, credit scores and, 14 basement apartments, 150, 151 bathroom fix-up, 168 Better Business Bureau, 81, 175, 190 bi-weekly payments, 40 bottom/back ratio, 18 break-even point, 4
building codes, 132, 150–151 building lots, see land building permits, 192–194, 196 Burnside, Kevin, 199 buy-downs, 32–34, 96 buyer’s agency, 72–74, 84–85, 173, 211, 212– 214, 218 Buyer’s Agency Agreement, 213–214 buyer’s market, 5, 9 buyer’s remorse, 211, 212 bylaws, 122, 134 California, 141 capital gains taxes, 152, 159–163 caps, cap rate, 39 carpet cleaning, 96 carryback financing, 22, 29–30, 44 CC&Rs (covenants, conditions, and restrictions), 81, 119, 122, 192 child support payments, 17–18, 51 closing costs, 27–28, 54–59, 94, 96 closing date, 97–98 comortgagor (cosignor), 44 comparables, 77, 89–90, 92–93, 100, 106–107, 169, 170–171 concessions, 9, 27–28, 44, 94–97, 201 condominiums, 109–114, 115, 116 checklist for, 110 exit strategy, 110, 112, 203–204 financing, 120–121 as good investment, 112 homeowners associations (HOAs), 115, 121–125 insurance for, 134–135, 138 interior emotional appeal, 88 neighborhood questionnaire, 113 new projects, 111–112 seller’s markets and, 10 conforming mortgage loans, 22, 24 construction loans, 189
241
242 Consumer Reports, 155 contingencies, 97–98, 217 appraisal, 203, 210 audit of homeowners association records, 123 home inspection, 80, 98, 209, 210 loan approval, 97, 209–210 sale of home, 201, 210 contractors checking on, 81, 206–207 proof of insurance, 128 relatives as, 211 contracts, see real estate purchase agreements conventional mortgage loans, 22, 24–25, 44 cooperatives, 112–116 financing, 121 homeowners associations (HOAs), 115, 121–125 insurance for, 134–135, 138 interior emotional appeal, 88 loft conversions, 113–114 neighborhood questionnaire, 113 seller’s disclosure form, 114–115 in urban areas, 112–114 county recorder, 79, 145 credit reporting agencies, 13–16, 64 correcting problems with, 15–16 credit reports from, 15, 41, 45–46, 48, 53, 56, 57 maintaining good credit, 13–15 recordkeeping and, 15 credit scores, 11–16, 40–42 credit simulators, 63 curb appeal, 87–88, 165–166, 191, 198 debt ratios, 16, 18, 208–209 decision-making problems, 211–212, 218 deductibles, insurance, 139, 141 Department of Agriculture, Rural Housing Service (RHS), 26–27 Department of Housing and Urban Development (HUD), 106 Department of Housing and Urban Development Settlement Statement (HUD-1), 51–55, 58–63, 144, 153 depreciation, 7, 130 desktop underwriting, 19 divorce decree, 51 documentation of credit transactions, 15 document preparation and processing fees, 56, 57 for mortgage lenders, 40–42, 50–51 for new construction purchases, 82–83 real estate purchase agreements, 82–83, 97– 98, 201–202, 216 down payment, 42–45 borrowing, 44 for FHA loans, 25–26, 44
Index from 401(k) or IRA, 44–45, 159 minimum, for cooperatives, 121 third-party programs, 23, 28, 30–31, 42–43, 95–97 for Veterans Guaranteed (VA) loans, 27–28 dual agency, 73, 84–85 earnest money deposit, 48, 97, 105, 202 earthquake insurance, 135, 141 electrical hookup, 192, 195 e-loan, 45, 62–63 emotional factors for buyers, 87–88, 206–207, 217 curb appeal, 87–88, 165–166, 191, 198 for sellers, 93–94, 171–174 endorsements, insurance, 135 Equifax Inc., 13 equity, defined, 7 escrow accounts, 56, 57, 58, 153 exclusive agency, 72–73, 213–214 exit strategy, 110, 112, 203–204, 216 Experian, 13 extended coverage, 130–133 Fair, Isaac and Co. (FICO), 11–12, 13 Fair Credit Reporting Act (FCRA), 15–16 Fannie Mae (Federal National Mortgage Association), 17, 19, 20, 23–24, 25, 40, 48, 117 Federal Housing Administration (FHA) loans, 13, 17, 22, 24, 25–26, 35, 37, 44, 48, 63, 108, 117, 121, 127, 142, 146, 197 FICO scoring, 11–12, 13 financial calculators, 18, 19 First American Title Company, 202 fixed-rate mortgages, 38 fixer-uppers, 26, 67, 78–80, 208 flip taxes, 115–116 floaters, insurance, 135, 140 flood insurance, 57, 135, 141–142 floor plans, 205–206 foreclosure sales, 78, 79, 98–100 Foremost Insurance Group, 183 401(k), making downpayment from, 44–45, 159 fraud, 26, 29, 43, 158–159 Freddie Mac (Federal Home Loan Mortgage Corporation), 17, 19, 20, 23–24, 25, 40 front/top ratio, 18 full price offers, 173–174 funding fees, 27–28 garage sales, 177–182 garbage fees, 53–54, 58, 59 gas lines, 195 Ginnie Mae (Government National Mortgage Association), 23, 24 Good Faith Estimates, 51–55, 58–63, 81, 189– 190, 196 green fees, 123–125
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Index Greenwald, Joni, 124 guaranteed replacement coverage, 130–133 handheld sonic measurers, 81 hard-to-sell properties, 207–208, 217 HOA (homeowners association), see homeowners association (HOA) home equity loans, 7, 23, 67, 88 home inspection as contingency, 80, 98, 209, 210 finding inspectors, 83, 105, 106 importance of, 99–100, 103–106, 211, 214– 215, 218 for precut and kit homes, 186–187 roofing inspectors, 166 home inventory, 135–137 home offices, 148–150 homeowners association (HOA), 109, 110, 115, 117, 118, 121–125 checking out, 215, 218 for manufactured homes, 187–188 rules of, 81, 122, 198, 215 home ownership as American norm, 5–6 financial advantages of, 6–7 location and, 7–8 renting versus, 3–5, 8 tax advantages of, 8 homeowner’s insurance, 56–57, 58, 127–140 components of, 133–134 home inventory for, 135–137 picking a company for, 137–140 policy options, 128, 129 replacement coverage, 130–133 standard coverage, 128–130 Homeowners Protection Act (1998), 37 Home Owners Warranty (HOW) Remodelers Program, 102 home warranties, 96, 101–103, 106 hookup fees, 192 house cleaning, as seller concession, 96 house payments, 16–20, 64–66, 208–209 house shopping, 64–86 checklist for, 74–78, 85–86 fixer-uppers, 26, 67, 78–80, 208 Internet house hunting, 83, 84–85 location and, 66–70 for manufactured homes, 189–191 maximum loan amount and, 16–20, 64–66, 208–209 narrowing down choices, 76–78, 84–85 new construction, 80–83 realtors and, 70–74 hybrid loans, 39 impulse purchases, 206–207, 217 income-to-debt ratios, 16, 18, 208–209 insurance, 126–146
in calculating maximum mortgage payment, 16 for moving, 176 private mortgage insurance (PMI), 35–38, 59, 142–143, 145–146 switching, 14 title, 57, 59, 143–145, 151 see also homeowner’s insurance; mortgage insurance International Association of Assessing Officers (IAAO), 153 International Building Code (IBC), 184 Internet finding mortgage loans on, 45–46 house hunting on, 83, 84–85 working with mortgage lenders on, 61–63 Iowa, 145 IRA, making downpayment from, 44–45, 159 jumbo loans, 25 kitchens, 167, 169, 197 kit homes, 186–187, see also manufactured homes land, 191–193 landscaping factors, 207 renting versus owning, for manufactured home, 187–188 laterals, 195 lease option, 29 leverage, 7, 65–66 lighting, in selling a home, 167 limited agency, 73, 84–85 loan limits, 26 loan origination fee, 57, 59 loans, see mortgage loans loan-to-value (LTV), 36 location, 66–70 cheaper deals and, 66–67 importance of, 7–8, 10, 69, 77, 78, 83–84, 204–207, 217 of manufactured homes, 198 neighborhood questionnaire, 113 overimproving and, 67–69 schools and, 70, 205 in selling home, 168 lots, see land lowball offers, 172 low doc mortgage loans, 40–42 low-down mortgages, 43–44 Manufactured Home Construction and Safety Standards (HUD code), 184 manufactured homes, 183–199 building permit fees, 192–194 costs for, 188–189, 193–194, 196–197 kit homes, 186–187 land for, 187–188, 191–193
244 manufactured homes (continued) mobile homes, 184, 187 modular homes, 183, 184–185, 188–189 panel homes, 185–186 precut homes, 186–187 resale value of, 194–199 as retirement homes, 198–199 shopping for, 189–191 site fees, 193–194 site improvement checklist, 195 as starter homes, 188, 194–198 total home cost worksheet, 196–197 types of, 184–187 upgrades on, 186–187, 191, 196–197 Microsoft Money, 15 mistakes, list of common, 200–218 MLS multiple-listing service, 29, 71–72, 76, 78, 89–90, 100, 157, 213 mobile homes, 184, 187, see also manufactured homes modular homes, 183, 184–185, 188–189, see also manufactured homes Morrell, Judy, on foreclosure sales, 79 mortgage brokers, 10, 54 mortgage insurance, 24 for FHA loans, 26, 35, 37 mortgage insurance premium (MIP), 17, 59 private mortgage insurance (PMI), 35–38, 59, 142–143, 145–146 mortgage interest adjustable rate mortgages (ARMs), 38–39 annual percentage rate (APR), 34–35 buy-downs, 32–34, 96 cap rates, 39 deductibility of, 147–148 ‘‘floating,’’ 32, 42 locking in rate, 32, 42 points and, 31–34, 56, 57, 96 principal, interest, taxes, and insurance (PITI), 16 mortgage lenders, 47–63, 213 automated underwriting and, 18, 19 avoiding predatory, 47–48 closing costs and, 54–59 comparing loans of, 51–55, 58–63, 81 credit scores and, 11–13, 14–15, 40–42 documentation and, 40–42, 50–51 finding good, 51–53 garbage fees and, 53–54, 58, 59 income from second job and, 17–19 on the Internet, 61–63 maximum house price and, 16–20 negotiating fees of, 59–61 on new construction, 80–81 preapproval and, 49–50, 52–53, 62, 202– 203, 216 prequalification and, 49, 65, 81, 89, 92, 95, 98, 100 qualifying for loans, 10
Index referrals from, 71 see also mortgage loans mortgage life insurance, 142–143 mortgage loans, 21–46 annual percentage rate (APR), 34–35 buy-downs, 32–34, 96 for condominiums and town houses, 120–121 contingencies concerning, 97, 209–210 conventional, 22, 24–25, 44 Department of Agriculture loans, 26–27 down payment sources, 25–26, 30–31, 42–45 FHA guaranteed programs, 13, 17, 22, 24, 25–26, 35, 37, 44, 48, 63, 108, 117, 121, 127, 142, 146, 197 home equity/second mortgages, 7, 23, 25, 38, 67 jumbo loans, 25 loan fraud, 26, 29, 43 locking in interest rate, 32, 42 maximum allowable, 16–20, 64–66, 208–209 mortgage insurance, 24, 26, 27–28, 35–38 overextending budget, 208–209, 217 payment options, 38–42 points, 31–34, 56, 57, 96 prepayment penalties, 12–13 qualifying for, 10 seller financing, 22, 29–30, 44 shopping on Internet, 45–46 state and local housing programs, 23, 28– 29, 95–97 subprime, 11, 12–13, 24–25, 46, 47–48 types of, 22–23 Veterans Guaranteed Loans (VA), 13, 22, 24, 27–28, 63, 108, 127 wholesale sector, 23–24 see also mortgage lenders moving failure to plan move, 200–201, 216 finding movers, 174–176 garage sales, 177–182 tax deductions related to, 176–177 multiple offers, 174 municipal grants, 23, 28–29, 95–97 National Association of Realtors, 5, 64 National Flood Insurance Program (NFIP), 141–142 National Home Warranty Association, 103 National Institute of Building Inspectors (NIBI), 105, 106 National Taxpayers Union, 155 negative equity, 188 Nehemiah Program, 30–31 neighborhood, see location Neighborhood Gold Program, 30–31
245
Index new construction, 80–83, 96, 103–106, 111–112 buying on impulse, 206–207, 217 purchase agreements for, 82–83, 201 no doc mortgage loans, 40–42 nonconforming mortgage loans, 22, 24, 25 nonexclusive agency, 72 notary fee, 57 Notice of Default, 79 offer price, 88–92, 171–174 full price offers, 173–174 lowball offers, 172 multiple offers, 174 offers contingencies, 80, 97–98, 123, 201, 203, 209–210, 217 decision-making problems and, 211–212, 218 emotional factors for buyers, 87–88, 206– 207, 217 emotional factors for sellers, 93–94, 171–174 prices for, 88–92, 171–174 timing of, 90, 92 open houses, 72, 74 Ordinance and Law coverage, 131–132 overpricing, 92–93, 107, 213 painting and decorating, 6, 96, 166, 207–208 panel homes, 185–186 part-time income, 51, 148–150 piggyback loans, 38 planned unit developments (PUDs), 115, 117– 119, 121–125 POC (point of connection), 195 points, 31–34, 56, 57, 96 preapproval letters, 62, 202–203, 216 importance of, 50, 52–53 prequalification versus, 49–50 precut homes, 186–187, see also manufactured homes preexisting conditions, 101, 103 prepayment penalties, 12–13 prequalification importance of, 89, 92, 95, 98, 100 for new construction, 81 preapproval versus, 49 sample letter, 65 price of houses, 87–108 appraisals, 106–108 asking price, 170–171 comparables and, 77, 89–90, 92–93, 100, 106–107, 169, 170–171 determining what to offer, 88–92 emotional factors in, 87–88, 93–94, 171–174 filling out paperwork, 97–98 foreclosures, 98–100
home inspections, 103–106 home warranties, 101–103 manufactured homes, 188–189 maximum loan amount and, 16–20, 64–66, 208–209 offer price, 88–92, 171–174 overpricing, 92–93, 107, 213 seller concessions and, 9, 27–28, 44, 94–97, 201 short sales, 98–99, 100–101 timing of offer, 90–92 principal, interest, taxes, and insurance (PITI), 16 private mortgage insurance (PMI), 35–38, 59, 142–143, 145–146 property taxes, 17, 58, 152–159 PUDs (planned unit developments), 115, 117– 119, 121–125 punch lists, 81–83 Quicken, 15 real estate owned (REO), 78, 79, 98–100 real estate purchase agreements, 97–98, 201 for new construction purchases, 82–83, 201 signing before sale of home, 201–202, 216 Real Estate Settlement Procedures Act (RESPA; 1974), 54–59 realtors, 70–74 buyer’s agency, 72–74, 84–85, 173, 211, 212–214, 218 listing agents, 98 refinancing, 14, 37, 39, 40, 48, 67 relatives, 210–211, 217 doing business with, 51–52, 70–71, 211 down payments from, 25–26, 44 as home inspectors, 104, 211 renting in condominiums, 110, 121 failure to plan move, 200–201 and fraud in seller financing, 29 home ownership versus, 3–5, 8 of lot for manufactured home, 187–188 part of home to tenant, 150–152 in planned unit developments (PUDs), 118 seller rent back, 96, 98 taxes on buying versus, 148 in town house developments, 117, 121 repairs, 107–108 replacement coverage, 130–133, 176 reserve funds, 123, 124 retirement homes, manufactured homes as, 198–199 retirement plans, making downpayment from, 44–45, 159 roofs inspection of, 166 in selling process, 166, 171 Rural Housing Service (RHS), 26–27
246 schools, 70, 205 secondary market, 23–24, 25 second job, 17–19 second mortgages, 7, 23, 25, 38, 67 Section 1031 deferred exchanges, 159–163 self-employed persons, 40–42, 50, 148–150 seller concessions, 9, 27–28, 44, 94–97, 201 seller financing, 22, 29–30, 44 seller rent back, 96, 98 seller’s market, 5, 9–10 selling, 164–182 contingencies for, see contingencies determining asking price, 170–171 exit strategy and, 110, 112, 203–204, 216 finding movers, 174–176 first impressions and, 165–166 garage sales, 177–182 handling offers, 171–174 hard-to-sell properties, 207–208, 217 moving-related tax deductions, 176–177 overpricing, 92–93, 107, 213 positioning for best price, 168–169 resale value of manufactured homes, 194–199 shaping up home for, 164–168 signing purchase agreement before sale of home, 201–202, 216 separation agreement, 51 settlement fee, 57 sewer/septic, 195 short sales, 98–99, 100–101 site fees, 193–194 sonic measurers, handheld, 81 starter homes condominiums as, 194–198 exit strategy and, 110, 112, 203–204 manufactured homes as, 188, 194–198 resale value in manufactured home subdivisions, 194–198 state housing programs, 23, 28–29 sticker shock, 7–8 student loans, 15 subcontractors, proof of insurance, 128 subprime mortgages, 11, 12–13, 24–25, 46, 47–48 swamp coolers, 197 taxes, 147–163 advantages of home ownership, 8 capital gains, 152, 159–163 and downpayments from 401(k) or IRA, 44–45, 159
Index flip taxes on sale of co-op shares, 115–116 moving-related tax deductions, 176–177 property taxes, 17, 58, 152–159 renting out part of home, 150–152 renting versus buying, 148 tax deductions, 147–148 tax deferred exchanges, 159–163 working at home, 148–150 Taxpayer Relief Act (1997), 149 tax service fee, 57 teaser rates, 23, 61, 81 title companies, 79 HUDs and, 54, 60 referrals from, 71 title insurance, 57, 59, 143–145, 151 town houses, 116–117 financing, 120–121 homeowners associations (HOAs), 115, 121–125 seller’s markets and, 10 transaction brokerage, 73 TransUnion, 13 Treganowan, Jeff and Susan, 83 twin homes, 115, 119–120 umbrella liability policy, 135, 139 underwriting automated, 18, 19 Fannie Mae/Freddie Mac standards for, 23– 24, 25 Uniform Building Code (UBC), 184 upgrades on manufactured homes, 186–187, 191, 196–197 on new construction, 80, 82 as seller concession, 96 in selling process, 171 upside down equity, 100–101, 188 utilities, 192 Veterans Guaranteed Loans (VA), 13, 22, 24, 27–28, 63, 108, 127, 142 warehousing the loan, 24, 121 water hookup, 192, 195 Watkins, A. M., 199 Webb, Martha, 168 working at home, 148–150 zero-down mortgages, 43–44 zoning, 150–151, 192
