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| GENE'S REAL ESTATE NEWS |
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Articles and Advice |
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| Understanding home appreciation By Inman News Think of appreciation as the paper profits in real estate. Your profits exist only on paper--in this case, your deed--until you actually sell the house. If you buy a house in a rapidly appreciating area, there is no guarantee that property values will be the same or higher when it comes time to sell. The economy may sour or your neighborhood may lose its luster. If you buy at the height of an upswing when demand drives up prices, you may overpay. Just like in the stock market, the flip side of boom is bust, or at least correction. If you overpay and prices settle out 10 percent lower down the road, you may not recoup all of your investment. Appreciation is nice to have, but not what you should bank on when you buy or sell a house. Almost every aspect of the national economy affects real estate appreciation: employment levels, business climate, housing supply and demand, affordability and of course, interest rates. A healthy economy and low interest rates drive demand, which pushes up prices and appreciation. Regional economic changes come into play as well, at times causing housing prices to see-saw up and down. Demographics play a significant role, too. In the 1980s, housing demand soared as the huge number of people born in the 1940s and '50s hit the market. Prices went up and many areas experienced appreciation that was greater than the rate of inflation, making real estate a profitable investment. As this group has settled into homeownership, lower demand in many areas has slowed appreciation to below inflation, making real estate less profitable than other kinds of investments such as mutual funds. Here are some tips for understanding the role of appreciation in your market and in the neighborhood where you want to buy: Look at recent sales. Get a comparative market analysis from your agent or go through public records at the tax assessor's office. You should be able to get a feel for sales volume, price direction and whether final sales prices exceed asking prices (a sure sign of a hot, appreciating market). Pay attention to local business news. Monitor reported real estate trends, but also find out about new industries coming to your area or other economic changes that may dramatically affect housing supply and demand. Know the neighborhood. Research the recent appreciation history of the area where you want to buy. Have prices risen steadily, see-sawed up and down, or been stable over the years? Historically, has the neighborhood been desirable, either because of its amenities or its affordability? Is there a lot of new development nearby? A sudden glut in the supply of new housing can lower property values in existing areas. Buying on the upswing. If you think about buying in a rapidly appreciating area, weigh your decision carefully. Decide if you should rent or buy by calculating the after-tax cost of renting, and comparing it with the after-tax cost of owning over five years. Renting may pencil out as the better bargain for now. If you decide to buy, buy only as much house as you need. The bigger the house, the greater the proportion you may overpay. If you have cash left over from your down payment, invest it elsewhere. Avoid a low-down-payment mortgage. If property values drop and you have to sell, you may not have enough equity in the house to pay off the mortgage and the selling costs, much less get any cash out. |
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| How to profit from home appreciation By Liz Poppens There are many ways to save money, but taking advantage of a run-up in home prices isn’t usually on any financial planner’s list. However, appreciating property values can offer at least two ways to save money. Many homebuyers today, especially first-timers, purchase homes with less than 20 percent down payments. In such situations, lenders require buyers to buy private mortgage insurance, or PMI, and to set up an escrow account to pay homeowners insurance and property taxes until you have more than 20 percent equity in the house. It can take up to 10 years to reach the 20 percent equity point on a standard 30-year loan. However, when home values are appreciating, as they are in most markets nationwide, that point can be reached much sooner. Dropping PMI and the escrow account could save hundreds of dollars a year in insurance premiums and interest earnings. On average, PMI adds $50 to $100 to monthly mortgage costs, about $5,000 to $10,000 over the life of the loan. As for interest earnings, some lenders do pay modest interest on escrow accounts, but not as much as homeowners could earn by saving money for property taxes and insurance themselves. Because of new federal legislation requiring lenders to be more vigilant about canceling PMI on loans of 80 percent or less, most lenders have set up guidelines for consumers. In most cases, a property must be reappraised to prove its new higher value. Appraisals cost between $300 and $400. Still, that cost is minimal relative to the long-term cost of PMI, especially if appreciating property values make it unnecessary. Canceling an escrow account may take more time, depending on the lender. However, it is worth pursuing while property values are on the upswing. Once the account is canceled, it is wise to set up an automated monthly withdrawal of funds for future property taxes and homeowners insurance into some kind of interest-bearing account. Property taxes usually come due twice a year while homeowners insurance premiums vary. Until those bills are due, the funds could be earning interest. Over the course of a standard 30-year loan, the interest could total thousands of dollars of extra savings. Not only could such savings pay for a child’s college or a terrific vacation, but some could be put toward paying off the mortgage early, too. |
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| Reacting to rising rates By Inman News What happens to the real estate market when interest rates rise? Higher interest rates can slow down home sales while lower interest rates tend to stimulate sales activity. Buyers like low interest rates because home loans cost less and they can afford to buy more. When interest rates increase, homes and loans are less affordable, shutting more people out of the real estate market. Other factors that affect the real estate market include job insecurity and low consumer confidence. What happens if a property stays on the market for a long time? The longer a property stays on the market, the more likely the seller is to receive low-ball offers, which are offers substantially below market value. What if I cannot find a house in the short time I have during a relocation visit? You may want to rent when you relocate. Renting in the new location gives you the opportunity to learn more about the area before you make a huge investment. It also can give you time to sell your home. What is the best time to finance a fixer-upper? The best time to buy a fixer-upper, if your intention is to turn the house around for immediate profit, is when home prices are climbing. Be careful that you don't get caught up in the buying frenzy that can occur in a hot market because you could end up overpaying for the house. This will cut into your profit margin. There is less risk if you are buying a fixer-upper to live in for several years while you fix it up. |
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| Buying a new home By Inman News It's tempting to assume that new construction is sound construction, but that's not always the case. Do your homework. Investigate the builder, evaluate the location, get a thorough inspection and negotiate for the upgrades you want. Many builders offer financing through a preferred lender, which may save you time and money. Investigate your loan options online to compare before you sign up for a loan on-site. Find a Good Builder Look for a developer first. Whether you find one through referrals or through your own research, investigate a developer's reputation carefully: Visit other projects (especially older projects) that the same developer built. Look for durability of construction. Talk to homeowners in these developments and in the one you're considering. Find out how well the builder responds to complaints and follows up on repairs. Some developers have a person or department right on site to handle repairs. Talk to authorities. Contact the Better Business Bureau, the state's regulatory agency for builders, and the county courthouse. Find out if there have been any complaints, disciplinary actions or lawsuits against the builder. Talk to vendors. Contact suppliers, subcontractors and lenders. Find out if the builder pays bills on time. Evaluate the location, just as you would for a resale home. New-home communities are often built on the developing edge of a metropolitan area, so make sure that a freeway isn't planned to come through in 20 years. Check with the local zoning and/or planning department and look at their master development plan (if they have one) for any future development activity that might affect you. Find out more about the neighborhood by talking to neighbors, local businesses, and schools; use HomeAdvisor to research school, crime, and demographics online. Most new-home developers want you to use their sales agents to purchase a home in the project, rather than bringing in your own representative, and most contracts favor builders. For example, a typical contract may not provide escrow funds to handle repairs after closing. In theory, the sales price, contract terms, upgrades and options are all negotiable. In reality, most builders would rather give upgrades to avoid lowering the price, which lowers the comparative market value of other homes in the development. Before you sign the purchase contract, find out exactly what the price includes in addition to the house, such as window coverings or landscaping. Ask about quality. Are the carpets, light fixtures, doors and windows you saw in the model the same grade that you will get in your home? Make sure your purchase agreement includes an itemized list of finishing details and who pays for them, which both you and the builder should sign. |
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| Why should I refinance? By Inman News If interest rates dive, your current loan may suddenly become more expensive than a new loan with a lower rate. You may just want to lower your monthly payment or tap some of the equity you've built up. Or you may want to change loans altogether, switching from a 30-year to a 15-year loan term or from an adjustable to a fixed interest rate. Even if you don't think you're ready to refinance now, it doesn't hurt to check your numbers and look at current loan rates. The lower your new interest rate, the less it will cost you to refinance, and the longer you plan to hold your new loan, the more likely it is that you'll save significantly in the long run. To recoup the cost of refinancing and achieve real savings, you need a realistic estimate of how long you'll stay in your house. Consider all possibilities, such as whether your job could change or if you could be transferred. Then do the math. On a 30-year, $120,000 loan at 7 percent, you could save about $20 a month for every quarter-point reduction in interest. If your new rate is 1.5 percent less than what you currently pay, that could mean saving as much as $120 a month, or $43,200 over the life of your loan. You may only plan to stay in your house five years, though, which means you would save only $7,200. If it costs you $3,000 to refinance your loan, your total savings then drops to $4,200. If you stay in the house only three years, you save even less. Assess your time frame realistically. It will help you know whether refinancing is for you, and also help you choose the right loan. When you refinance, you essentially reset the clock on paying for your house. Refinancing can be an effective savings tool if you want to trim your monthly payment or cut the overall interest you pay on your loan, especially if you match your new loan to the amount of time you plan to keep your house. For example, if you keep your house a long time, refinancing from an adjustable-rate loan to a fixed-rate loan could save you significantly over the long run. If your current monthly payment is comfortable and you plan to keep the house a while, refinancing from a 30-year loan to a 15-year loan could cut your overall interest payments and build your equity faster. The tradeoff is this: while the rate will be around 0.25 percent lower on a 15-year loan, the payment (figured on a shorter term) will be about one-third larger. On the other hand, if you stay in your house only three to five years, you may want to look at adjustable-rate or balloon-payment loans so you can take advantage of the even lower rates these loans carry in the early part of their terms. Compare both short-term (or up-front) and long-term costs for loans of equal amounts to make a fair comparison. Short-term costs include points and closing costs you'll pay. (Your lender is required to provide a written estimate of settlement costs with a refinanced loan, just as with a home purchase loan.) The long-term cost is the total interest on the loan. To compare total interest, get an amortization chart from your lender or ask your loan agent to help you. An amortization chart breaks down each monthly payment into interest and principal amounts for any interest rate. For example, if you plan to hold your loan for five years, total the interest for the first 60 payments on various loans you're considering. Then add the short-term costs for each option. Compare the results with your current loan. Alternatively, have your lender give you a modified Annual Percentage Rate (APR)--which wraps both of these costs into one figure--for each loan you are considering. This tells you which loan option will cost you the least, apart from differences in timing of interest costs versus up-front costs, which could be significant. To Refinance or Not to Refinance? One way to compare is to weigh interest rates, closing costs and total interest accrued against the length of time you think you'll hold the loan. In the example below, a new 30-year, fixed-rate loan (at 6.875 percent interest with two points) offers greater savings than the existing loan or a new loan with no points. However, the savings in total payments or total interest alone come to little more than $1,100 on both refinanced loans if you hold the new loan only five years. |
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| How can I protect myself selling a home? Here are a few guidelines for protecting yourself when you sell your home. First, pick the right agent. Your listing agent will represent you in interactions with other agents, prospective buyers, lenders, inspectors, and various professionals associated with the real estate business. Be sure to select a trustworthy agent with whom you are compatible, one who will represent you honestly and fairly in your dealings with others during the sale. Next, be fastidious about preparing your property for sale. This will not only facilitate the sale and bring you a higher price, it could prevent after closing disputes with the buyers. Make a list of all the elements of your home that need repair or replacement. Your agent can help you with this. If you're uncertain about the condition of a major system, like the roof or furnace, you might want to hire a professional to inspect and issue a report. Determine how much it will cost to repair or replace defective items. If you can't afford to repair everything on the list, ask your agent to help you prioritize. Disclose any defects that you're aware of that you don't fix before selling. HOME SELLER TIP: Sellers often fear that if they disclose defects to buyers it will impede the sale of the property. This rarely happens. In fact, buyers appreciate knowing about property defects before they buy. Problems can develop when buyers discover defects after closing that they know the sellers were aware of, but failed to disclose. A California home seller answered no when he was asked if he had any drainage or flooding problems. He had remodeled his home to create a family room in the lower level that had previously been a basement. During the first heavy rain after the buyers moved in, the family room was flooded with water. The buyers sued the sellers in court and won. It's natural to feel proud of your home. But, avoid over-selling your home to prospective buyers. Be particularly careful about rooms that were added without required building permits. Let's say your home has four bedrooms, plus a room that was added without permits that could also be used as a bedroom. From a marketing and legal standpoint, you'd be better off marketing your home as a four bedroom, not a five bedroom, home. Interested buyers will discover when they look at your home that it has an extra room that could be used for a bedroom. They'll be pleasantly surprised to find more than they anticipated. If you market the home as having five bedrooms, buyers will be disappointed to find that the fifth bedroom isn't a legal bedroom. If this information isn't discovered until after closing, you could have a legal problem. Many after-closing claims involve misrepresentation of square footage. When a property is passed from one owner to the next, the square footage is often rounded up to a higher number. For instance, a 2900 square foot home might be represented as approximately 3000 square feet. The next owner might say the house has about 3000 square feet, perhaps a little more. Never guess about square footage. Square footage claims can involve substantial monetary damages. THE CLOSING: Check with your agent or real estate attorney if you have any questions about your disclosure obligations. |
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| When is the right time to buy? By Dian Hymer Some buyers will tell you that the best time to buy is during the winter holiday season. Is this good advice? There are fewer buyers looking then, so there is less competition from other buyers. Also, although the selection of homes for sale may be lower than at other times of year, those who are selling are usually motivated. An added benefit of buying during the winter months is that you may have a chance to see listings while it's raining. This makes it easier to spot a leaky roof or a serious drainage problem. Other buyers, however, prefer to do their home buying in the middle of summer. There's often a seasonal slowdown in home buying activity during July and August. Prospective buyers, as well as agents, take vacations. So, this too can be a time when the competition from other buyers might wane temporarily. And, if you want to relocate before school starts, this is the last opportunity you have to make the move. The reality is that homes sell all year long. While, there is some fluctuation from one quarter to the next, it's less than you might imagine. Other factors, such as interest rates and general economic conditions can have more effect on a buyer's decision to buy than the time of year. Most buyers prefer to buy when interest rates are low. Low interest rates make housing more affordable. The lower the monthly payments, the easier it is for buyers to qualify for mortgages. All other factors being equal, you can afford to buy a more expensive house when rates are low. A more expensive house usually means a larger house. If low interest rates enable you to buy a home that will suit your long-term needs, you'll probably stay put longer. Moving less often is one way to save money. Interest rates are currently at a 40-year low. Today's low rates are responsible in part for the strong housing market. Nationally, inflation-adjusted home prices increased 5.7 percent in 2001 over the previous year. This was the seventh year in a row that prices increased. Last year, homes sales hit a record high, which could be surpassed this year. The strong housing market has caused many to wonder whether the housing market is a bubble poised to pop. If so, is now a good time to buy? Usually, it's best to buy when prices are low. In many places around the country prices are at an all-time high. A recent study by the Joint Center for Housing Studies of Harvard University suggests that housing will remain strong. This will primarily be due to a shortfall of sufficient housing to keep pace with the high rate of household creation expected over the next 20 years. The study did not rule out a temporary drop in home prices. But, if there is a decline in prices, it will probably be short-lived. HOUSE HUNTING TIP: The best time to buy is when you have the financial wherewithal, when you find the right home, and when you have a high degree of certainty that you won't need to sell soon. Buying for the short-term is risky because prices could level off, or even decline, as the housing market slows, which it will at some point. THE CLOSING: hould you wait for a better time to buy? It's almost impossible to time markets. Also, it's often not easy to find the right place to buy. So, if your finances are in order, and you're buying for the long run, plan to buy when you find the right home at an affordable price. |
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