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| The Almanor Almanac |
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Articles and Advice |
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| How buyers, sellers are closing deals in today's market By Dian Hymer Negotiation is back in style, and is likely to remain a necessary part of buying or selling a home in today's beleaguered residential housing market. Other key elements to a satisfactory closing are flexibility, perseverance, creativity and diligence. Needless to say, you need to work with the best real estate professionals you can find in your area. In most cases, it takes a team effort to put a home-sale transaction together and see it through to fruition. HOUSE HUNTING TIP: Successful negotiations usually require give and take by both parties. It has been said that the sign of a successful negotiation is one where both parties walk away feeling they have won. It has also been said that the key to a mutually acceptable agreement is that both sides feel a little wounded. A must in this market is a commitment to exhaust all possible ways to put and keep a deal together before calling it quits. Recently, it looked like a purchase contract was about to fall apart. The buyers had originally offered a price that seemed insultingly low to the seller. The seller set his personal feelings about the price aside and countered the buyers' offer at a price he felt was reasonable. The buyers accepted. As it turned out, the price was one that was halfway between the seller's list price and the price the buyers offered. Splitting the difference is often a winning strategy. The house in question had been well inspected before the buyers entered into contract to buy it. However, when it came time for the buyers to remove their inspection contingency, they requested a large monetary credit from the seller. Not only did the buyers discover a few health and safety issues that weren't covered in the previous reports, they also developed a serious case of cold feet. These buyers were able to find jumbo financing at a good interest rate. However, to obtain this financing, they had to make a larger cash down payment than anticipated. This left them feeling cash-strapped. The seller refused to credit the buyers the amount of money they requested. However, he was willing to credit some money. Or, he would carry a second mortgage for the buyers so that they didn't have to put so much cash down. Flexibility gives the parties to a negotiation a way to explore options for making a deal or for keeping one moving forward. In order for the buyers in this case to feel comfortable closing the sale, they needed a concession from the seller in order to ease their financial strain. By offering to carry a second mortgage against the property, the seller found a way to free up more cash for the buyer. As it turned out, the buyers elected not to take the seller-financing offer and accepted a monetary credit at closing. Credits at closing require approval by the buyers' lender. Most lenders have limits on how much money a seller can credit a buyer at closing. It is often equal to 3 percent of the purchase price, but cannot exceed the actual amount of the buyers' nonrecurring closing costs. These are costs paid for the buyers on a one-time-only basis at closing, such as title insurance or a transfer tax. A seller carry-back would also need lender approval. The lender in first position would want to ensure that the terms of the second mortgage were reasonable and would not be likely to put the buyers in financial jeopardy. THE CLOSING: Sellers should carefully consider whether it makes good financial sense to carry financing for a buyer who is making a relatively small cash down payment. |
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| What to look for in a final walk-through inspection Property should be in same condition as day you signed contract By Ilyce R. Glink Most home buyers will have at least two opportunities to inspect their property before closing on the purchase. First, most buyers will include a contingency in the contract that allows them to do a professional home inspection by the home inspector of their choice. This inspection typically happens right after the sales price has been agreed to, usually within a week or 10 days. If the home inspector finds anything wrong in the property or decides further inspections (perhaps for radon, heating and air conditioning systems, or mold) are called for, the home buyer will be able to hire specialists to figure out if there is an insurmountable physical problem with the property. Assuming those inspections go well, the second opportunity to inspect the property is just before the property closes. The preclosing inspection, or final walk-through, as it is often referred to, is a home buyer's last opportunity to walk through the property before closing. What you're looking for here is not at the same level as the initial professional home inspection. In a preclosing inspection, you simply want to make sure that the property is in the same condition as it was on the day you agreed to buy it. To avoid getting burned, you schedule the walk-through as close to the actual closing as possible, certainly within the 24 to 48 hours prior to closing. If possible, the sellers should have already moved out. The whole point of the walk-through is to protect yourself and your future property from sellers who aren't as nice as they seem to be or who are actually as nasty as they appear. By inspecting the premises, you're making sure the seller has lived up to his or her agreements in the sales contract. And if he or she hasn't, you want to know about it in advance of the closing so remedies (both monetary and otherwise) can be agreed upon before money changes hands. What should you look for in a preclosing inspection? To start with, you want to make sure that the condition of the home hasn't changed since you signed the contract several months earlier. Believe it or not, a lot can change in the ensuing weeks. To make sure the home is in the same condition, you'll want to turn on every appliance, open every door, make sure nothing's broken (lights, fixtures, windows, etc.), be certain everything the seller agreed to leave is actually there and in good shape, and be certain that when the sellers moved out, they did no damage to the home. Sometimes movers can accidentally scrape a wall or pull up carpet in the process of packing up the contents of a house. If you do your preclosing inspection while the movers are there, you'll have a harder time getting around them to make sure that the property is in good shape. If you get there before the sellers have packed anything up, you might wind up with some nasty surprises on the day you move into the property. I learned the hard way that sometimes sellers just don't want you to find out certain things until you've closed on the property. Nearly 20 years ago, my husband Sam and I bought our first place. It was a vintage co-op built in the 1920s. Our sellers were seniors, and they were a bit quirky. The property hadn't been touched in years. When we did our final walk-through, we noticed that the water was turned off in the kitchen sink. We wanted to run the dishwasher, which was really old, but didn't want to turn on the water if it was off. Looking back, it's hard to imagine why this wasn't a red flag for us. But we were really happy to be buying our first place, which was taking just about all the money we had in the world. We didn't question it. We just bought it and moved in. The first night we unpacked the dishes and decided to run a load in the dishwasher. At well past midnight, my husband turned on the water and we put in the dish soap and turned on the machine. We went to bed. We were awakened early the next morning with pounding on our front door. Our downstairs neighbors came into their kitchen and noticed that the liquid contents of our dishwasher had dripped down through the ceiling into their kitchen, ruining their window shade. My husband and I looked at each other and we knew why the water had been turned off. Too bad we didn't find that out ahead of time. Still, the damage could have been worse. As I recall, it cost us $600 to fix the damage in our neighbor's apartment. |
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| Price it right when selling in today's market By Dian Hymer We're in the midst of a challenging home-sale market in many areas. However, soft markets can provide opportunities for some home sellers. The trick is to price your home right for today's market. The most difficult reality for most sellers to face is that prices in their neighborhood may have dropped during the last year or two. Some sellers will find that it may not make sense to sell if the probable sale price is too low. If you have the luxury of waiting for a better market, stay put for now. Be sure to check with a knowledgeable real estate agent before you make a decision to move forward -- one who knows the local market well. HOUSE HUNTING TIP: It is an advantageous time for move-up buyers, who may have to sell for less than they would have a few years ago. But, they may also pay a lot less for the home they buy. A seller usually has an advantage selling when there isn't much competition from other listings. Even though the listing inventory was low in some areas at the end of 2007 and the beginning of 2008, anticipate that there will be more listings coming on the market in April and May -- the traditional home-selling season. Today's home buyers are extremely price-conscious. If there is a lot to choose from, price will certainly be a big factor. A price that's too high for the market won't bring the desired result. Homes don't necessarily lose value at the same rate in a soft market. In the current environment, buyers are more cautious about what they buy because they know that the property they buy might drop in value before it starts appreciating. They buy for the long term and are less prone to make compromises. The homes that have what most buyers want tend to hold their value better in a down market than do homes that have an incurable defect. Here a few examples of defects that can't be cured: an awkward floor plan that can't be fixed, a location next to a noisy freeway or a house that is either up or down a lot of stairs. Homes with defects that can't be corrected are easier to sell if there's low inventory, and it's a seller's market. We are now in a buyer's market. This doesn't mean you can't sell your home if it has an incurable defect. However, you will need to account for the deficiency in the price. Keep this in mind when you compare your home with one that sold recently that had level-in access, a livable floor plan, and wasn't on a busy street or next to a freeway. The condition of your property will also be scrutinized more carefully in the current market than it would have been a few years ago. You can sell a property that has deferred maintenance. But, you will sell it more quickly and for a better price if you can repair defects and have the property looking great when it hits the market. If this is not possible, take this into consideration in your list price. It's difficult to hit the market price for a property if there haven't been many recent sales in the neighborhood. If you miss the target and find that you're home is priced too high, lower it as soon as possible. A price reduction is no longer a stigma in this market. THE CLOSING: Letting a listing sit on the market too long at a high price sends the wrong message to buyers and could result in a lower sale price if market prices in your area continue to decline. |
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| Despite lower jumbo rates, refi may be unwise By Dian Hymer Borrowers assumed when the conforming loan limit increased from $417,000 to $729,750 in high-priced areas like New York City, Los Angeles and the San Francisco Bay Area that lower rates on jumbo financing would follow. Unfortunately, the conforming jumbos (also called jumbo lights) were initially priced considerably higher than the conventional conforming loans. For example, on May 2, 2008, a $417,000 conforming loan was available with a 5.38 percent interest rate and one point. Points is the term lenders use for the loan origination fee. One point is equal to 1 percent of the loan amount. At the same time, a jumbo light was priced around 6.25 percent and one point. Mortgages are offered with or without points. The mortgage interest rate will be about one quarter percent lower if borrowers pay one point than it would be if they paid no points. On May 8, pricing on the jumbo light conforming mortgages was brought in line with the conventional conforming loans. This is good news for both home buyers and homeowners who need to refinance. A 30-year jumbo light fixed mortgage was offered at 5.625 percent and one point and 5.875 percent with no points on May 9. Conforming loans in amounts to $417,000 were offered for the same interest rate, with a 1/4 or 3/8 percent discount on the origination fee. Nonconforming jumbo financing is still running about 7 percent. With the recent rate reduction on conforming jumbos, borrowers searching for larger mortgages will be able to achieve a lower blended rate by combining a $729,750 conforming first mortgage with a home equity loan of up to $500,000 with an interest rate as low as 5 1/8 percent. Homeowners who purchased four to five years ago using a fixed ARM mortgage product have been worried about refinancing in today's difficult financing arena. It was anticipated that when the mortgage reset from fixed to adjustable, much higher mortgage payments would follow. Fixed ARMs are mortgages that have a fixed interest rate for a period of time (often three, five, seven or 10 years). At the end of this period, the loan converts to an adjustable-rate mortgage (ARM) with an interest rate and monthly payments that fluctuate. ARMs are tied to an index, which is a cost of funds. A margin -- usually in the 2-6 range -- is added to the index rate to determine the current mortgage rate. HOUSE HUNTING TIP: Many fixed ARMs are tied to either a Treasury or London Interbank (LIBOR) index. Thanks to the Fed's rate-cutting campaign, these indices are relatively low today. You may find that it makes more sense financially to keep your mortgage for now even though it converts from fixed to adjustable, particularly if you plan to move soon. On May 8, the 1-year LIBOR rate was 2.99 percent. If your mortgage reset on May 8 to an ARM that was tied to the 1-year LIBOR and had a 2 percent margin, your interest rate would have adjusted to 4.99 percent. To find out if it makes sense to refinance or not, look at your note. It spells out the terms of the loan such as the interest-rate adjustable schedule, the index that your interest rate is tied to and the margin. Your lender can provide you with a copy of the note. There are risks involved in waiting to refinance. If market values decline, your home might not appraise for enough at a later date to pay off your existing loan balance. Also, the Fed is watchful for any indication that inflation is getting out of hand. THE CLOSING: If inflation fears rise, the Fed will stop lowering interest rates, and could start increasing them again. |
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| Pros, cons of buying home in today's market Fixer-upper not necessarily best investment for first-timers By Dian Hymer When the housing market slows down, buyers often wait on the sidelines for a clear sign that the market has recovered. The only problem with this strategy is that you can only know for sure that a market has turned through hindsight. In other words, you can't time the market. A slow market is perceived as an opportunity by some buyers, as it takes longer for listings to sell. The inventory of unsold listings tends to grow, giving buyers more choice than is the case in a hot seller's market when listings sell quickly. In a high-inventory market, there are usually fewer multiple offers so buyers can cut a better deal with the seller. However, it pays to be careful about what you buy and how you finance the purchase. HOUSE HUNTING TIP: The least expensive home in an area may not be the best investment. Unless you are a contractor with years of experience fixing up properties, you should hire the best inspectors you can find to look carefully at the condition of a property before you buy. Many home buyers, particular first-timers, don't give enough attention to the cost of maintaining a home. Home maintenance is a necessary part of home ownership. It can be expensive, particularly if you need to hire others to do the work. Some homes require more maintenance than others. A good inspector should be able to give you a good indication about how much work a home needs now and how much it will need on an ongoing basis. Buying a well-maintained home that will also have relatively low ongoing maintenance is one way to keep your overall housing costs down. Inexperienced home buyers should resist buying a fixer-upper just because it's offered at a cheap price for the neighborhood. It's difficult to get a firm grasp on renovation costs during the inspection contingency period, particularly if it's a big job. Remodeling projects can run over budget because of unanticipated problems like faulty electrical or plumbing, or an old furnace that goes bad. Or the city inspector could require that you do additional work to correct non-code-complying improvements done by previous owners. These sorts of costs can mount up so that you end up with far more invested in the property than it's worth on the market. Try to avoid buying a home that has an incurable defect. This is something that you can't change, like a location next to a freeway. These homes don't hold their value well when the housing market softens. A risk of buying in a slow market is that the value of what you buy might drop before it rises. Or, prices could stay flat for some time, which means that you won't build equity unless you pay down principal on your mortgage. If you should have to move during a time when prices are soft, you might not be able to sell for the amount you paid. To decrease this risk factor, don't buy for the short term. Give careful consideration to how you finance your purchase. Stay away from mortgages that have short due dates and balloon payments. If the market in your area stays soft for longer than anticipated, you don't want to be caught having to refinance at a time when your home might not appraise for the price you need to complete the transaction. THE CLOSING: A benefit of buying in a soft market is that you have the opportunity to buy at a reasonable price, without having to compete with other buyers. But, it makes no sense if you put yourself at financial risk. |
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| Cut mortgage payment in half upon retirement Best ways to use spare cash to your advantage By Jack Guttentag "I am 58 and just purchased the home in which my wife and I plan to spend the rest of our lives. We paid points to reduce the rate on a 30-year fixed-rate mortgage to 4.75 percent. I am feeling very insecure. The payment is affordable now, but I plan to retire in seven years and my income will drop. At that point, my property taxes will almost certainly be higher as well. I fear that when I retire, the mortgage payment will become a major strain on my finances. I would like to get it down to about half of what it is now. What is the best way to do that? I have free assets equal to about half the loan balance." Your free assets make it possible to eliminate your insecurity about a payment you can't afford. The issue is how best to use those assets. Paying Down the Balance and Refinancing: Using your free assets to pay down the balance of your existing mortgage would shorten the term but not reduce the payment. You would have to refinance to get the payment down, which would mean replacing your 4.75 percent rate with a current market rate of at least 6 percent. That is inadvisable. You may have to give up the 4.75 percent rate when you retire, but there is no point in giving it up now. Paying Down the Balance and Modifying the Loan: Some lenders, for a fee, will modify a loan contract. Because the rate on your mortgage is so low, it would be in the lender's interest to have the balance paid down, even if not completely. Assuming the lender is willing, you can use your free assets to pay down the balance and then modify the contract based on the new balance. This would allow you to retain the 4.75 percent rate on half of your loan. If you pay off half the balance and the rate and term remain the same, the payment would fall by half as well. This would give you the peace of mind you are looking for. However, there can be no assurance that the lender will be willing or able to modify the loan. Your mortgage could be sitting in a pool of mortgages that are the collateral for a mortgage security, in which case a modification would not be possible. Without the modification, there would be little point in paying down the balance. Furthermore, it is probably a mistake to pay off any part of a 4.75 percent debt when risk-free investments are available at yields higher than that. Repaying debt is an investment that yields the interest rate on the debt. Since you can currently buy an insured 7-year certificate of deposit (CD) yielding at least 5.25 percent, you will be better off when you retire if you buy the CD rather than pay down the mortgage balance. Sit Tight and Invest: I would use the spare cash to buy a CD that will mature about the time you retire. At that point you take stock of the market to plan your next move. If you can continue to earn more than 4.75 percent, you remain invested. On the other hand, if rates have come down to the point where you can no longer invest at a yield above 4.75 percent, you liquidate the CD, pay down the mortgage balance and refinance it to lower the payment. The old maxim that you should have your mortgage paid off when you retire had a lot of merit for people whose wealth was largely in their home. For people with significant amounts of financial assets, however, the maxim needs revision. What matters is not the mortgage balance alone, but the balance relative to financial assets. Retiring with a $200,000 mortgage balance and $400,000 of financial assets is preferable to retiring with no mortgage and no assets. BUT: Note that I recommended investing in an insured asset. Don't use the revised maxim as a license to gamble with your retirement, as a lot of market gunslingers would have you do. They would like you to do a cash-out refinance for the maximum amount possible, which they will arrange for you, and invest the proceeds in risky assets, which they will also arrange for you. They take theirs off the top, but whether it works for you depends on how well the investments do. It might work out or it might not, but if you are close to retirement, it is not a gamble I recommend. |
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| Avoid a transaction collapse A home seller's worst nightmare is selling to a buyer who disappears mysteriously at some point during the transaction. The deal never closes, leaving the seller in the lurch just before moving day. As worrisome as this scenario seems, in reality this sort of calamity rarely happens. Occasionally a buyer gets cold feet soon after his offer is accepted and backs out of the deal. This can happen if a buyer gets caught up in the frenzy of a multiple offer competition. When he realizes that he's in over his head, he regrets his decision and asks to be released from the contract. Although disappointing, the damage is usually minimal when a transaction collapses early on. In a multiple offer situation, the seller may have negotiated a back-up contract with another eager buyer. In this case, the seller moves directly from the primary contract to the backup contract without having to market the property again. House hunting tip: Usually when a real estate transaction falls apart it's for a good reason, and not due to the buyer's whim. Typical problems involve property inspections and financing. But with a good team of real estate professionals on your side, many of the problematic issues that arise during a transaction can be resolved satisfactorily. The key is to anticipate what could go wrong. By anticipating potential problems, you can often safeguard against them. Buyers can avoid most financing problems by getting preapproved for the financing they need to complete the purchase before they even make an offer to buy a home. A preapproved buyer has already been approved for a mortgage by the lender. His credit has been checked and his employment and down payment funds have been verified. He's ready to go. Sellers who receive an offer they like from a buyer who hasn't been preapproved should include a provision in the contract for the buyer to be preapproved within a day or two of acceptance of the contract. This way, if the buyer is unable to do so, you haven't wasted much time. Even with a preapproved buyer, there's always a chance that the property won't appraise for the purchase price. A low appraisal can put a transaction in jeopardy. It's a good idea for the buyer's agent to meet the appraiser at the property armed with recent comparable sales. This helps to insure that the property does appraise for the sale price. The most common reason that real estate transactions fall apart is inspections. Buyers should include an inspection contingency in any home purchase contract. A home inspection will almost certainly reveal defects. Even brand new homes have defects. If defects are discovered that the buyer can't live with, and that the sellers are unwilling or unable to correct, the transaction can collapse. Sellers are wise to disclose any known defects to the buyers before an offer is made. Most states have seller disclosure requirements that require sellers to disclose material facts. A material fact is anything that will effect a buyer's decision to buy or the price he'd be willing to pay. In addition, sellers should consider having pre-inspections done before their home goes on the market. For example if the roof leaks, disclose it. Then take the next step and find out what it will cost to repair it, and make the estimate available to the buyers before they make their offer. The closing: The more information the buyers have upfront about the property they're trying to buy, the better. This minimizes the chances of the deal falling apart due to inspections. |
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