Send to Printer

Real Estate Guide

Barry Nordendale REALTOR® (DRE License Number 01323389) Coldwell Banker C&C Properties 2120 Churn Creek Redding,  CA  96002 509.351.1823 barry@reddinghomeprices.com

Articles and Advice
Does home remodeling always pay off? By Dian Hymer Perhaps you've heard stories about homeowners who've greatly improved their net worth by remodeling homes and selling them. But, while remodeling can add value, there's no guarantee that a future buyer will pay you enough to recoup your investment. Consider the example of a homeowner who lost his home in the Oakland Hills, Calif., firestorm of 1991. Rather than rebuild, this fire victim decided to buy an existing replacement home. He invested his insurance proceeds in the purchase and subsequent remodel of the property. When he decided to sell several years later, he barely recouped the money he'd invested in the renovation. He had over-improved the property for the neighborhood. Buyers weren't willing to pay more than the property was worth on the open market. Some homeowners fall into the trap of thinking that their home is worth what they paid for it, plus the money they've invested in remodeling projects. This logic is often faulty, and can result in unwise investments. Replacement cost value is not the same as market value. Market value is the price a ready, willing and able buyer will pay for a property. This is the only value that's relevant when you're selling your home. Replacement cost value is an important consideration when you've evaluating how much insurance coverage you'll need to replace your home if it burns down. But, it may have little bearing on the selling price of your home. Another homeowner made the mistake of completing a major expansion and renovation of a home before doing a thorough investigation of the infrastructure. After years of living in a home that was too small and had an inefficient floor plan, the owners hired an architect to redesign the home to better suit their lifestyle. The renovations indeed added value from a market perspective. When the owners put the home on the market, they received multiple offers. They accepted an offer at a price that more than returned the money they'd invested. However, the sellers ended up giving back a huge chunk of their profits when a termite inspection revealed that there was extensive dry rot in the internal framing. REMODELING TIP: Before tackling a major remodel, make sure to have the property inspected by a structural pest control inspector. It's also a good idea to have an engineer look at the foundation to make sure that you're not investing good money to improve a home that's sitting on a bad foundation. Another reason to inspect the infrastructure before remodeling is that you may be able to upgrade facilities while you're taking care of routine maintenance. Before starting an extensive remodel of the kitchen, another homeowner had a termite inspection done. The report revealed dry rot in the master bathroom. Rather than simply repair the damage, the owners had the kitchen contractors rip out the master bath and redo it at the same time they did the kitchen job. By doing so, they reduced the cost of the bath remodel significantly. Furthermore, instead of a simple repair, the owners ended up with an entirely new bathroom that added considerably to the value of the property. To realize the most from your remodeling efforts, stick to classic designs and finishes. Trendy designs may look outdated five or 10 years from now when you decide to sell. Don't invest in a major renovation if you're planning on selling in the near future. It's highly likely that you won't be repaid for your investment. THE CLOSING: Stick to cosmetic facelifts if the sole purpose of your investment is to fix your home up for sale.
How much work should you do before selling? By Dian Hymer Recently a couple that owned a home in Berkeley, Calif., decided to move to neighboring Piedmont. They started their search by visiting Sunday open houses. It was quite apparent to them which listings had been prepared for sale and which ones had not. They were invariably drawn to listings that were charming, clean, and uncluttered. Looking at open houses helped this couple realize what they needed to do to their Berkeley home to ensure that it would attract buyers. By the time their home went on the market, it was charming, clean and uncluttered. It sold quickly and the sellers realized a handsome profit. As a seller, you have several options when considering how much work to do before selling. One option is to do relatively little and sell the property in it's "as is" condition. Another is to invest time, effort and money into fixing the property up before you sell. A third option is to do a combination of the first two approaches. In making your decision, keep in mind that in general buyers pay more for homes that are in move-in condition. Most buyers would prefer to buy a turnkey listing that doesn't need a lot of work. A home in great condition will usually attract more buyers than will one that doesn't show well and needs a lot of work. But there is a market for fixer-upper properties, although it is more limited. Fixer buyers will pay more for fixers that have a big upside potential. Fixer listings sell at a discount when compared to listings that are in move-in condition. HOME SELLER TIP: A higher sale price is not the only benefit to be derived from fixing up your home for sale. If you're doing the fix-up work, rather than the buyer, you have control over the improvements. You can shop the repair work for the best price. This can save you as much as 15 to 30 percent. Just make sure you use licensed contractors who will abide by city building permit requirements. Often the decision of how much fix-up for sale work to do will depend on how much time you have before marketing your home. The best approach is to plan ahead so that you have as much time as possible. It can take months to get a house ready to sell, depending on what kind of work needs to be done. No matter what kind of time frame you're working with, consult with your real estate agent before embarking on major fix-up work. Plan to walk through your home with your agent. Make a list of all the items that should be done before you sell. Ask your agent which reports should be ordered and order them as soon as possible. The next step is to get bids from contractors and trades people for the recommended work. Also find out about availability and how long it will take to complete the work. With this information you can fine-tune your fix-up for sale work. Some projects may be too costly and some may not be able to be completed within your time frame. Your agent can help you prioritize if necessary. Other projects, like de-cluttering and cleaning cost practically nothing except your time and effort. THE CLOSING: Even if you decide to sell "as is," it usually helps the sale to present a property that is clean and free of debris. Buyers need to see what you have to sell in an uncluttered state in order to make a decision to buy.
Should sellers repair defects before selling? After years of living in a home, it's easy to fall into a habit of overlooking home maintenance chores. If there's no urgency, many homeowners procrastinate. Often problems don't get fixed until a major disaster occurs like a roof leak in the middle of a monsoon. Deferred home maintenance can become a problem, however, when you decide to sell. Most buyers want to buy homes they can move right into without having to make a lot of repairs. Sellers need to decide before they put their home on the market whether to fix deferred repairs or leave the work for a future buyer to do. Usually sellers who have the time, money and inclination will do better on the sale of their home if they fix problems before they list their home for sale. A home that is in move-in condition is one that appeals to a broad audience of prospective homebuyers. First-time homebuyers, and buyers with busy lifestyles, often won't consider buying a home that needs a lot of work. They haven't the time or experience to deal with the problems. The listings that are in the best condition are in the highest demand. They can attract serious attention from more than one buyer. If multiple offers occur, the price sometimes gets bid up. Regardless of whether there are multiple offers, a house that is in good condition will usually sell more quickly than one that needs work. And a quick sale often results in a selling price that is close to the list price. Sellers who don't make needed repairs before putting their homes on the market may have difficulty selling, depending on how much work is needed. Because "fixer-upper" homebuyers make up a small portion of the homebuyer market, there will be less overall interest in the property than there would be in a similar property that is fixed up. If your home needs a lot of work, it could take a long time to sell and it might sell for considerably less than it would fixed-up. Usually the longer a listing sits on the market unsold, the lower the ultimate selling price. Selling a home that needs a lot of work could delay the closing if the buyer's lender requires that the work be completed as a condition of granting the mortgage. One homeowner sold a home that needed about $25,000 of termite and dry rot repair. The buyer's lender said the work had to be completed by close. The buyer and seller both wanted a quick close. But the job was so extensive, and combined with intermittent delays due to rain, it took about two months to complete the work. FIRST-TIME TIP: Most sellers can't afford to fix everything that's wrong with their home before listing it for sale. It's important to prioritize to make sure that your money is spent on repairs that will have the most positive impact on prospective buyers. Call a knowledgeable real estate agent in your area for a consultation. Complete a walk-through of your home with the agent, with pen and pad in hand. List all the improvements the agent suggests you complete before selling. Then ask him or her to order the list in terms of most and least important. Then ask how much difference it will make in terms of selling price if you complete none, some or all of the recommended repairs. THE CLOSING: The amount of time and money you have usually determines how much work gets done. Dian Hymer is author of "Starting Out, The Complete Home Buyer's Guide," Chronicle Books, Revised 1998. Copyright 1998 Dian Hymer Distributed by Inman News Features
What is an "as is" sale? Occasionally, listings are advertised as "as is" sales. To some buyers this signals a potential bargain property. For others, an "as is" sale carries a negative connotation. It suggests that the property might be tainted. Often, neither perception is accurate. It's difficult to know from an advertisement what "as is" means with respect to the sale of a residential property. It can mean that the property is being sold in its present condition and without a warranty. In other words: The seller makes no guarantees about the property's condition. In some states, like California, sellers may provide a general warranty of habitability when they sell a home. Generally, this means that the roof is free of known leaks and the dwelling systems like plumbing and electrical are in working order. With an "as is" sale, such a warranty probably wouldn't apply. Probate, trust and foreclosure sales are often "as is" sales. The sellers of these properties could have acquired them under adverse conditions (either because a relative died or because a buyer defaulted on a mortgage). In these cases, the seller might have little, if any, actual knowledge about the property's condition. In many cases, sellers of probates and foreclosures haven't even seen the properties. FIRST TIME TIP: Before you agree to purchase a property "as is", make sure that you have it thoroughly inspected. If it's a foreclosure, you might not be able to include an inspection contingency in the purchase contract. In this case you'll have to complete inspections before you make an offer. When several buyers are competing for a hot listing, the winner is often the buyer who makes an "as is" offer. Sellers usually prefer an "as is" offer because it relieves them of the responsibility of completing repairs before closing. The buyers take on the burden of repairs which cuts down the hassle factor for the seller. Just make sure that you include an inspection contingency in an "as is" offer unless you've had a chance to complete all necessary inspections before you made the offer. Sometimes purchase contracts are written "as is" for convenience in dealing with the buyer's lender. Let's say that the sellers had a termite inspection done before they put their home on the market. The termite report calls for the shower, floor and tub in the bathroom to be replaced. The cost of this work will run $5,000. The sellers are willing to pay for the repair work but the buyers would prefer to do the work themselves so that they can remodel the bathroom to their own specifications. So rather than asking the sellers to do the termite repairs before closing, the buyers write their purchase contract to be "as is" regarding termite work. And they ask the sellers to credit them $5,000 at closing. Buyers purchasing a property that they intend to renovate extensively often prefer to purchase the property on an "as is" basis. For example, if the house has a $25,000 termite bill and it needs a new $10,000 roof, the buyers might prefer to reduce the purchase price by $35,000 and buy the property "as is". An "as is" sale doesn't necessarily mean the property is a bargain, nor does is mean that the property should be dismissed as unacceptable. Find out the nature of the work required to put the property in good condition. Then decide if you're up for the project. THE CLOSING: If an "as is" property will suit your long-term needs when it's fixed-up, it might be worth considering. Dian Hymer is author of "Starting Out, The Complete Home Buyer's Guide," Chronicle Books. Copyright 1998 Dian Hymer
The ABCs of credit reports By Robert J. Bruss My extensive "research" for this report included obtaining my current credit reports from the three nationwide credit bureaus – Experian, Trans Union, and Equifax – plus obtaining my FICO (Fair, Isaac and Co.) scores from these three credit bureaus. I invested $44.95 on the Internet at www.myfico.com for this information. I could have purchased just one credit report there for $14.95, including my FICO score, but it would not have been complete. Most mortgage lenders obtain a 3-in-1 combined credit report on prospective borrowers so I checked all three of my credit reports. Each credit bureau had different information and a different FICO score. Not all credit card companies, department stores, banks and other creditors report your credit activity to all three credit bureaus. Some creditors don't report your credit history to any credit bureau, presumably because they want to keep your good (or bad) credit to themselves. This can hurt if you are trying to establish credit because your credit card company, department store or gasoline company doesn't report your on-time payments. To my surprise, my FICO scores from the three credit bureaus vary significantly. Trans Union says my FICO score is 769. Equifax reports my 771 FICO score. But Experian calculated a 799 FICO score. Each FICO credit report included my strong credit points and my weak points. Ironically, Experian, where I had the best credit score, made the worst comments about me: "The proportion of balances to credit limits (high credit) on your revolving/charge accounts is too high. The amount owed on your accounts is too high." But my Equifax report emphasized, "You have no late payments reported on your credit accounts, you demonstrate a relatively long credit history, and you have a low proportion of balances to credit limits (high credit) on your revolving/charge accounts." Equifax added, "You have too few/too many accounts being reported on your file (I have 33 credit accounts, most with zero balances, whereas average U.S. consumers have 11 current credit accounts)." Finally, Trans Union said, "You have no late payments reported on your credit accounts and you have a low proportion of balances to credit limits (high credit) on your revolving/charge accounts," but "The amount owed on your accounts is too high." At least I liked their FICO scores! FICO says consumers in my score range of 750-799 have a delinquency rate of 2 percent. But FICO scores below 500 have an 83 percent default rate, 500-529 shows a 72 percent delinquency rate, in the 550-599 range there is a 52 percent probability of delinquency, 600-649 scores show a 31 percent delinquency rate, and 650-699 have a 15 percent delinquency rate. Over 700 the delinquency rate drops to 5 percent up to 749. If your FICO score is 800 or over, you have a 1 percent delinquency likelihood. The median FICO score is 723 – meaning an equal number of individuals have FICO scores above and below that number. Most mortgage lenders consider a FICO score above 680 will entitle you to the lowest interest rate. The www.MyFICO.com Web site provides lots of valuable insights on how to improve your FICO score. Virtually all creditors now use FICO scores to rate credit and mortgage applications. But each creditor's criteria vary widely. For example, I understand Home Depot won't issue its credit card to an applicant with a bankruptcy within the last 10 years. But most other creditors will approve credit if the bankruptcy has been discharged (although the borrower's interest rate won't be the lowest). However, a major FICO flaw is their scores do not consider your income, savings, IRA and retirement accounts in relationship to your credit. FICO scores only weigh the length of your credit history, on-time payments (even one late payment beyond 30 days hurts FICO scores), number of credit accounts, percentage of balances to available credit, collections, derogatory public records (such as judgments and unpaid property taxes), and number of recent credit inquiries with the past six months. Before applying for credit, it is very smart to invest, as I did, in your 3-in-1 credit reports and FICO scores. Incidentally, your own personal credit report purchases do NOT show up or count as an "inquiry," which can hurt your FICO score if you have too many inquiries by creditors in the last six months.Although you can go to each credit bureau's individual Web site to obtain your credit report and their version of your FICO score, the easiest and best place to obtain all this information is at www.myfico.com. Maybe your credit reports and FICO scores are better than you think. If you find mistakes that are hurting your FICO score, each credit bureau includes either an online, telephone or mail procedure to correct the errors. Be sure to follow up because the credit bureaus are not famous for great customer service! After you register an error, by federal law each credit bureau has 30 days to either verify their information is correct or remove unverified information. Ask for a free corrected copy of your credit report after the error is removed. EXAMPLE: Several years ago, I sold a rental house at about the same time the property taxes were due. The title company was supposed to pay my property taxes so title could be delivered to the buyer free of any unpaid property taxes. But the title company failed to pay the property taxes! After a few months, the unpaid property taxes showed up on my credit reports. When I asked the title company to take care of the problem, they argued the property taxes were paid. But the local tax collector insisted they were unpaid. Eventually, the title company paid the property taxes, plus the 10 percent penalty for late payment. Then I had to get those unpaid property taxes removed from my credit reports. If I had been applying for a mortgage or other credit, that delay of several months to clean up my credit reports would have meant I probably couldn't get a mortgage. Before leaving the topic of credit reports, I hasten to add, by the end of 2005, everyone will be entitled to one free credit report from each of the three nationwide credit bureaus – Trans Union, Experian, and Equifax. So far, only residents of the Western and Midwestern states can use this new program. But, for many years, by state law the residents of Colorado, Georgia, Maryland, Massachusetts and Vermont have been entitled to one free credit report each year from each credit bureau. To obtain your free credit report from any of the three credit bureaus (but not including your very important FICO score), go to www.AnnualCreditReport.com or phone 1-877-322-8228.
Beating buyer's remorse By Inman News Determining what you want in a house is easier said than done. It is useful to think about what you liked and disliked in houses you have seen. What was it about these houses that attracted you? Also consider what you don’t like about your current home. Your aim in the analysis stage is to filter your inventory and eliminate houses that do not fit your criteria. Keep in mind that you will probably have to make many compromises; The perfect house probably does not exist. You can only make an informed decision after evaluating the available housing stock and considering what you can afford. Only then will you be in a position to decide what you would be willing to compromise on. When remorse sets in -- as it usually does -- remind yourself what you’re feeling is normal and the uncomfortable feelings will pass. Try not to attach more significance to these feelings than is warranted. Just because you’re feeling regretful about your decision to buy doesn’t mean that you shouldn’t go through with the purchase. Doing your homework will help you feel more confident about your decision: Learn what home prices are in the area. Find out about different kinds of mortgages. Study a sample purchase agreement before you buy. Have the house you're buying thoroughly inspected to make sure you aren't buying unwanted problems. You may think you don’t want to spend more in monthly expenses on a house than you pay in rent. But that may be unrealistic and may ignore other issues. Although it is not a good idea to stretch yourself too thin financially, you should take the tax advantages of homeownership into account when deciding your price range. Property taxes and interest on a residence are deductible in most cases making your price range probably 25 to 33 percent higher than you might think. However, budget your finances and make sure you aren’t getting in over your head when you decide how much you can spend each month. The last thing you want is to not be able to make ends meet. Despite all your preparation, buying a home will probably still be stressful. One way to ease that stress is to find good professionals who can assist you.
Valuing your home improvements When is remodeling a waste of money? By Dian Hymer It would be nice if you could count on getting one dollar back when you sell your house for each dollar you invested in renovations. Most people hope for more than a dollar-for-dollar return. In reality, many improvements return less than the amount invested. For example, the 2004 Cost Versus Value Report, recently published by the National Association of Realtors, reported that nationally, the average percent recouped on a bathroom remodel was only 90.1 percent. It was 88.1 percent for a deck addition, 81.2 percent for a family room addition, and a mere 79.4 percent for a major kitchen remodel. Does this mean that remodeling is a waste of your time and money? It can be, especially if you go about a renovation in a haphazard fashion. It's important to do due diligence investigations before embarking on a remodel project, just as you would if you were considering buying a new home. There are many variables to consider. First, consider that the figures quoted above are national averages. The amount recouped on a remodel depends in large part on where you live. There's significant variability from one city to the next, according to the NAR report. For instance, nationally, homeowners recouped only 90 percent on a bathroom remodel. But, the amount recouped for the same job was 109.7 percent in New York City, 100 percent in San Francisco, and only 61.3 percent in Denver, on average. The return on a remodeling investment will also depend on the value of your home, particularly in relationship to the value of homes in your neighborhood. If you have a small home in a neighborhood of larger, more expensive homes, you could come out ahead by enlarging your home. However, it's important to keep costs in line so that you don't end up over-improving your home for the neighborhood. Buyers tend to discount a home that's priced above the value of other homes in the neighborhood. Before remodeling, it's also important to consider your competition. In some areas, certain remodeling projects are taken for granted. For instance, if you're in an upscale neighborhood of older homes where most homeowners have remodeled their kitchen and bathrooms, you will be penalized price-wise by the market if your home is outdated. In areas where home prices are rising rapidly, you're likely to recoup more on your remodel investment than you would during times of meager appreciation. With this in mind, you're more likely to recoup your investment over the long term. HOMEOWNER'S TIP: There's a subjective factor that can't be overlooked when remodeling. This factor is often referred to as pride of ownership. And, don't discount the value of creature comfort. There's a certain sense of well being to be derived from a home that suits your lifestyle while aptly reflecting who you are. Despite these factors, from an investment standpoint, it makes sense to consider resale value before making an investment in a major renovation. This doesn't mean that you should remodel your home with someone else in mind. But, if you're aim is to recoup as much of your investment as possible, it's wise to consider home buyer preferences in your area. If your remodeling is not in tune with what buyers want, it could actually decrease the value of your home. Also keep in mind that while trends vanish quickly, quality and good taste are timeless. THE CLOSING: The NAR Cost Versus Value Report was based on professional judgment rather than on actual sales data. Therefore, the report is somewhat subjective. However, it does point out the importance of carefully considering before remodeling.
Should I ask the seller for a credit? By Dian Hymer Most purchase contracts include an inspection contingency. Sometimes, the buyers remove this contingency without asking the seller to make any repairs. But if the buyers ask the seller to remedy a defect, the resolution often takes the form of a credit from the seller to the buyer that is applied toward the buyers' nonrecurring closing costs. Closing costs are the miscellaneous fees that buyers pay at closing, such as title insurance, transfer taxes and loan origination fees, to name a few. Nonrecurring closing costs are those fees paid at closing that are paid on a one-time-only basis, such as title insurance and points. Recurring closing costs are paid on an on-going basis, like homeowner's insurance and mortgage interest. You may wonder why the credit is for the buyer's nonrecurring closing costs rather than for repairs. One reason is that if you mention repairs in an addendum to the purchase contract, the buyer's mortgage lender could require that you get the work done by closing. This could be difficult or impossible depending on the type of work and on the amount of time you have to get it done. Lenders used to allow sellers to credit money that was held in an escrow or trust account for work do be done after closing. Few lenders will allow this anymore. Today many lenders sell their loans on the secondary money market soon after the loans are originated. A lender might have difficulty selling the loan with a holdback until the work is complete. If so, the lender loses time and money. Plus, it's an administrative hassle for the lender. Lenders limit the amount a seller can credit to ensure that a credit to the buyer doesn't reduce the amount of the buyer's cash down payment. From the lender's standpoint, the security of a loan is in part determined by the amount of cash the buyer is investing. The more the buyer has invested in a property, the less likely he is to default on the mortgage. A credit for the buyer's nonrecurring closing costs does not change the amount of the buyer's cash down payment. HOUSE HUNTING TIP: Negotiating a nonrecurring closing cost credit from the seller can be tricky. Some sellers are suspicious of buyers who request a monetary credit. They assume that it's just a ploy to get money out of the seller. You may have an easier time negotiating a credit if it's presented to the seller as an option. For example, the buyers of a new home discovered during their home inspection that the home lacked adequate ventilation in the crawl space under the house. The inspector recommended the installation of a mechanical ventilation system. Instead of simply asking for a monetary credit for the recommended work, the buyers gave the seller the option of either installing the ventilation system or crediting them money at closing to be applied toward their nonrecurring closing costs. The seller chose to the credit the money. One advantage of taking a credit rather than having the seller do the work before closing is that you can select your own contractor to do the work. Also, you can oversee the work to make sure that's it's done right. Before asking for a credit for nonrecurring closing costs, check with your lender to see how large a credit the lender will allow. It's often no more than 3 percent of the selling price. Also, the credit usually cannot exceed the actual amount of the buyer's nonrecurring closing costs. THE CLOSING: So, if you're buying a $500,000 house, the lender would theoretically allow a credit of up to $15,000. But, if your nonrecurring closing costs total $11,000, the lender will limit the allowable credit to this amount.
How can I reduce my closing costs? By Dian Hymer Often it's easier for buyers to qualify for a mortgage than it is for them to scrape together enough cash for the down payment and closing costs. Down payment amounts vary. Usually they're in the range of five to twenty percent of the purchase price. In addition, closing costs can run another $5,000 to $10,000, depending on where you buy and the cost of your loan. Closing costs are fees associated with a home purchase that are paid at closing. Buyers and sellers both pay closing costs. Who pays which costs is often set by local custom, but it can be negotiable. Typical buyer closing costs include such items as: fees associated with getting a mortgage, homeowner's insurance, titles and closing fees, inspection fees, proration of property taxes and transfer taxes (if there are any). FIRST-TIME TIP: One of the easiest ways to lower your closing costs is to get a zero-point mortgage. Points is the term used for the loan origination fee. One point is equal to one percent of the loan amount. A $180,000 mortgage with a 2-point loan fee will cost you $3,600 at closing. A no-point $180,000 loan will save you $3,600 in closing costs. But, expect to pay a higher interest rate on a no-point loan. There's an inverse relationship between the points you pay and your interest rate. Another way to reduce your closing costs is to close late in the month. Lenders usually collect interest for the current month at closing. If you close on the fifth day of the month, you'll owe the lender 25 days of interest at closing. If you close on the twenty-fifth day of the month, the lender will collect 5 days of interest when you close. Closing at the end of the month can reduce your closing costs considerably if your loan balance and interest rate are high. Asking the sellers to credit you money to pay for some of your closing costs is another way to reduce the amount of cash you'll need to close. Keep in mind that when you ask sellers to do this, it's the same as asking them to accept less for their home. For example, if you offer $200,000 with a credit from the sellers of $3,000 for your closing costs, this is the same as a $197,000 offer. In a competitive situation, where multiple buyers are trying to buy the same home, you may have to pay full price or more to be the successful bidder. If you need the closing cost credit to make the deal work, raise your offer price by the amount of cash you need and then ask for the credit. For example, if the list price is $200,000, offer $203,000 with a $3,000 credit for your closing costs. The property must appraise for the higher price for this to work. Also, lenders have restrictions on how much they'll allow sellers to credit for closing costs: often it's 3 to 6 percent of the purchase price. And, most lenders won't allow a credit that exceeds the actual amount of the buyers' non-recurring closing costs (costs paid by the buyers one time only at closing, such as points and title fees). THE CLOSING: If the sellers are renting back from you after closing, ask them to credit you their rent money at closing. Clear this with the lender in advance, otherwise, the lender might require that rent be given to you later, when the sellers vacate. If the rent is credited, it reduces the cash you'll need to close.
Best time to take out mortgage when buying home Paying cash, refinancing later has its benefits By Jack Guttentag Q: I have enough cash to swing an all-cash purchase if I want to, but I don't want all of my money tied up in the house; I want to get some of it back in a mortgage. What is the downside of paying cash and taking out the mortgage later versus taking out the mortgage at the time of purchase? A: The downside of taking the mortgage after you have purchased the house is that the mortgage will then be classified as a "cash-out refinance" as opposed to a "purchase mortgage." Why does that matter? Cash-out refinance loans are viewed as riskier than purchase loans, and therefore are priced higher. On prime loans, the rate difference is about 0.125 percent. Only a small proportion of those who take cash-out refinances have houses that don't already have a mortgage, as in your case. Most have a mortgage and want to raise cash, and some of those are in financial distress and end up in default. That's why cash-out refinances have higher loss rates than purchase mortgages, and are charged a higher price. The other side of the coin is that it is more difficult to shop effectively for a purchase mortgage than for a refinance. Borrowers purchasing a house are faced with a closing date on which they must provide funding to complete the purchase. This means that at some point in the process there is not enough time for the purchaser to back out of a deal and start anew with another loan provider. Once past that point, they are vulnerable to a variety of tricks by unscrupulous loan providers that can cost more than 0.125 percent In contrast, the refinancing borrower who feels badly treated by a loan provider can opt out of the deal at any point and start again with another loan provider. Usually, timing is not critical on a refinance. Even after a loan closes, a borrower refinancing with any lender other than his current lender, has three days to rescind it. The lender must then return all fees and remove any liens on their property. This right is not granted to loans used to purchase or construct a house. I think if it were me, I would pay cash and mortgage later, despite the price difference. With a refinance, I'm in charge. Q: "Is there a limit on the number of mortgage payments one can make in a given year?" A: This question turns out to be a little more complicated than you may have imagined. The reason is that lenders may accept a payment without necessarily crediting it to the borrower's account at that time. That means that your question is really two questions. One, how many times a year will a lender accept the borrower's payment? Two, how many times a year will a lender credit the borrower's account? To illustrate the distinction, some lenders have weekly payment programs under which they accept payments every week. However,they credit the payments to the borrower's mortgage monthly. They thus accept 52 payments a year but they only credit 12. In effect, the borrower paying weekly is making his monthly payment early, which gives the lender the use of his money until month-end. It doesn't amount to a lot but it certainly compensates the bank for the additional processing expense. The same distinction applies to biweekly payments. On biweekly programs that are run by third parties, the borrower pays biweekly but the lender credits the payments monthly. The interest earnings on the borrower's money, which is held by the third party until the monthly payment is due, is part of the income of the third party. Most of them also charge the borrower a fee. A biweekly program offered by a lender may go either way. Some lenders credit the biweekly payments biweekly, some monthly. On a $100,000 loan at 6 percent for 30 years, the biweekly that credits payments monthly pays off in 297 months and total interest payments are $92,193. The same loan with payments applied biweekly pays off in the equivalent of 294 months, and total interest is $91,022. These numbers are derived from calculators 2b and 2bi on my Web site. The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania.
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.
Who's entitled to buyer's deposit in failed real estate deal? By Dian Hymer Sellers often feel that they should be entitled to keep the buyer's deposit money if the buyer fails to complete the purchase for any reason. But, more often than not, when a home purchase transaction falls apart, the deposit ends up being returned to the buyer. Most purchase contracts include contingencies. These are conditions that must be satisfied in order for the sale to go through. Usually, the buyer is entitled to have his/her deposit returned if he/she is unable to satisfy a contingency, depending on how the contract is written. For example, suppose the buyers include a contingency that specifies the terms of the financing they'll need to arrange in order to close the deal. Furthermore, the clause stipulates that if the buyers are unable to obtain that financing, their deposit will be returned to them. They earnestly attempt to line up the financing, but are unable to do so. Maybe interest rates rose to a point where they could no longer qualify for the loan they needed. Or, perhaps their credit report turned up issues that made it impossible for them to qualify. In either case, the buyers would probably be released from the contract without penalty. However, let's say these buyers didn't attempt to obtain financing. Instead, they went out and bought another house. They strung the sellers along for a couple of weeks and then claimed they couldn't get a loan and wanted out of the deal. In this case, the sellers could have a legitimate claim to the buyers' deposit. But, to find out a definite answer to this question you would need to consult with an attorney – ideally one who specializes in residential real estate. In some states, home buyers use attorneys to draft their purchase contracts and to handle the closing. In most states, however, home buyers have their real estate agent prepare the purchase contract using preprinted forms that have been drafted by attorneys. Once the purchase contract is signed by the seller it becomes legally binding, and it includes all the terms and conditions that will apply to the transaction. HOUSE HUNTING TIP: Having real estate agents prepare purchase contracts usually works fine. But, if there is a glitch in the transaction that requires a legal interpretation, your real estate agent will not be able to help you unless your agent is also an attorney. It's against the law for someone who is not an attorney to practice law. Many buyers and sellers have a hard time understanding why their real estate agent who prepared the contract for them can't advise them on such things as who's entitled to the deposit if the transaction fails. However inconvenient it might be to consult with an attorney before deciding to lay claim to a buyer's deposit, it's absolutely essential. In one case, a buyer backed out for what he thought were sound reasons. The seller asked his agent if he was entitled to the buyer's deposit. The agent said yes. Based on this advice, the seller refused to return the buyer's deposit. The buyer then hired his own attorney, sued the seller and won. Residential purchase contracts often include a liquidated damages clause, which sets a limit on the damages that could be awarded to the sellers if the buyers breach the contract. A breach occurs when the buyers back out for a reason that's not provided for in the contract. Sellers frequently assume that if both the buyers and sellers have agreed to include a liquidated damages clause in the contract, this means that the buyers will automatically lose their deposit if they fail to close the transaction. In some cases this might be so; in some cases not. THE CLOSING: Before jumping to a conclusion, consult an attorney.
Gauging pre-sale fix-up work on your home By Dian Hymer Usually it's worthwhile for a seller to fix-up a home before putting it on the market. Listings that are in move-in condition attract more buyers. The more interest there is in a listing, the more chance a buyer will make a strong offer. Buyers tend to pay more for homes that they can move in to without doing a lot of work. The prospect of a profitable sale is a strong incentive for some sellers to turn themselves into general contractors, for the short term. This can have a positive result because most buyers have difficulty imagining what a listing might look like if they were to do the refurbishing. There's nothing like showing the finished product to convince buyers that they'll feel at home in your home. Another reason to consider fixing your home up for sale is that it will make it easier for real estate agents to sell it. Houses that show well are a pleasure for agents to show, so they are shown more often. If your home is a show stopper, word will get around. This can only help bring about a quick and profitable sale. But beware. A good fix-up for sale job, including a well-staged decor, can blind buyers to defects that they will surely discover after they move in. Keep this in mind when you embark on your fix-up for sale endeavors. There's a fine line between making a listing presentable and misrepresenting the condition of the property. Disclosure laws vary from state to state. Check with your real estate agent or attorney to make sure that you don't violate your disclosure obligations in your effort to show your home in a better light. One seller figured that his three-bedroom home would sell for a lot more if it had a family room. So, before he listed his home for sale, he converted an area of his basement to a separate room by adding paneled walls and a dropped ceiling with recessed lights. He painted, installed a carpet over the cement floor and moved furniture in to create an inviting setting. Thanks to the seller's improvements, the house sold for a good price. However, the seller ended up being sued by the buyers because he failed to disclose that the house had a serious drainage problem. The house was located in California where home sellers are required by law to disclose all material facts when they sell. Not only did this seller fail to disclose the problem, he intentionally led the buyers to believe that the downstairs room was usable living space. However, during the first heavy rain storm after the buyers moved in, the basement flooded. The basement improvements were damaged beyond repair. HOME SELLER TIP: Before tackling a major fix-up-for sale project, have your home thoroughly inspected so that you are aware of any serious problems. You may want to make some repairs while you're preparing your home for sale. However, if your renovations conceal rather than correct a problem, make sure the buyers are aware of this before they make an offer. Sellers often fear that disclosing defects will keep their home from selling. Actually, the opposite is true. Buyers who are aware of defects before they buy usually don't sue the seller after closing. However, when buyers find out after closing that the sellers intentionally concealed a defect, it's a different and often unpleasant story. THE CLOSING: It's good to prepare your home for sale in order to show off its potential. But, concealing material defects in the process can get you into trouble.
Mortgage insurance Can my lender remove it By Dian Hymer First-time buyers are often caught in a "Catch 22". They usually have the hardest time qualifying for a mortgage. And they have the hardest time accumulating cash for a down payment and closing costs. But they are the buyers who are most often required to pay mortgage insurance, which increases the cost of homeownership and makes qualifying even harder. Mortgage Insurance (also called Private Mortgage Insurance) is insurance that is paid by the borrower to protect the lender in case the buyers stop paying (default) on the mortgage. The cost of Mortgage Insurance (MI) varies depending on the type of mortgage (fixed- or adjustable-rate), the payment plan and the amount of the cash down payment. It can range from .5 to .95 percent of the loan amount for the first year's premium. The premiums are usually the highest on the riskiest loans, like an adjustable-rate mortgage for 95 percent or more of the purchase price. Because MI is insurance and not interest, it's not tax-deductible. Lenders usually require borrowers to pay for MI if the loan amount exceeds 80 percent of the purchase price. Ninety and 95 percent financing is popular with first-time buyers who often don't have enough cash saved to make larger down payments. To avoid paying MI, buyers who have a 10 percent down payment get a first mortgage for 80 percent of the purchase price and a second mortgage for 10 percent of the purchase price. This is called 80-10-10 financing. Since the first lender's loan amount doesn't exceed 80 percent, MI isn't required. Some sellers will carry a 10 percent second for qualified buyers. Seller financing can be less expensive than institutional financing because sellers usually don't charge up-front loan fees. Institutional lenders often charge one point for a second mortgage (1 point equals 1 percent of the mortgage amount). 80-15-5 financing is also available for buyers who only have 5 percent cash to put down on a home. The borrower avoids MI with this financing scheme because the first mortgage lender only loans 80 percent of the purchase price. However, the interest rate charged on a 15 percent second mortgage, with a 5 percent down payment, will be about 10.75 percent in today's market. You can expect to pay about 9 1/8 percent on a 10 percent second mortgage, with a 10 percent down payment. Be aware that most second mortgages have a balloon payment. A balloon payment is a final payment that's considerably higher than the periodic (usually monthly) payments. Most institutional seconds have payments that are amortized on a 30-year payment schedule. This keeps the monthly payments low and makes it easier for borrowers to qualify. But, these loans are usually due at the end of 15 years, at which time a balloon payment is due. FIRST-TIME TIP: Some borrowers are choosing low-down payment mortgages that do require MI payments. This is particularly the case in areas where home prices are rising rapidly. One San Francisco Bay Area buyer got a good deal on the price of a home. He took out a mortgage for 95 percent of the price to finance the purchase. Prices rose so quickly that the buyer was able to convince the lender to remove MI within 2 years. The lender was willing to do so because an appraisal of the property showed that the mortgage amount equaled 80 percent of the updated market value of the property. THE CLOSING: Lenders are more flexible about removing MI for buyers with good credit history than they were in the past.
Shopping for a good home deal By Dian Hymer Everyone wants a good deal. But, good deals are few and far between in the many low-inventory markets around the country. Recently a couple was trying to buy a starter home in El Cerrito, a hot housing market in the San Francisco Bay area. They lost out over and over again in multiple offer competitions. So they decided to try a new strategy. Rather than continue making offers on hot new listings in their price range, they made an offer on an over-priced listing that had been on the market awhile and hadn't sold. The seller had lowered the list price just as the buyers made their offer. The buyers had no competition and were successful in buying the property. Their good fortune was that they were the first to hear that the seller was willing to accept less than his list price. HOUSE HUNTING TIP: If you're having troubles finding a home to buy—or a home to buy at the right price—consider listings that aren't drawing a lot of attention from other buyers. Well-located listings at the best price and in the best condition are the ones that sell the fastest, and for the most money. To find a good deal, you have to be willing to go against the herd. There is a certain comfort, however, in buying a property that everyone else wants. A listing that's in high demand is likely to be desirable when you want to sell it. Buying a prime listing can be a good investment, as long as you don't over-pay. But, in a multiple offer competition, you may have to pay a premium to be the successful bidder. You don't want to buy just any listing that's not selling. If the property has defects that can't be fixed—like too many levels or a chopped up floor plan—you may have a difficult time selling it later. Also, if the sellers are unrealistic about the price or condition of their property, you may not want to waste your time. Before you make an offer on an over-priced listing, have your agent talk with the listing agent and try to determine the seller's motivation. Find out if there have been any offers. If there have, why didn't the property sell? If the seller is obstinate about his price, go on to another property. However, if the seller is considering a price reduction, give it a go. If the listing agent thinks the seller is not ready to negotiate, ask to be informed when the seller has a change of heart. The best time to make an offer on an over-priced listing is usually just before the seller drops the price. Otherwise, you could face competition. Most buyers gravitate to the most attractive listings. Buyers who can see past a dowdy décor may pick up a property at a bargain price. The trick is to know a house with potential when you see it. Looking at a lot of listings and analyzing what you see can help. Often it's the paint colors, updated finishes and attractive furnishings that make a listing desirable. With a little imagination, you could create an appealing ambience yourself, after you buy. Listings that are back on the market because a deal fell apart present another opportunity. These listings often sell for less the second time around. Find out why the deal fell apart. But remember to buy a house with good bones, not one with serious problems. THE CLOSING: Homes with good appreciation potential are always a good deal. Look in areas that are adjacent to neighborhoods that have already experienced a significant run-up in prices. These areas could be the next hot markets.
Should I fix up my home or just sell it? By Paul Bianchina Making the decision to sell your home is always a tough one. There are financial and emotional decisions to make, and any number of factors that can tip the balance one way or the other. The emotional decisions are ones that only you can answer, but as to the financial side of things, there are some common sense questions that may make the decision a little easier. What Is Your Home's Condition? If you are faced with large home improvement repairs such as a new roof, dryrot repairs, or major plumbing or electrical system overhauls, you need to weigh that carefully. If your home has substantially appreciated in value over the years and the needed repairs would create a financial burden for you, it may be wise to consider selling – you'll have to ask a little less than you would if those repairs weren't necessary, but you may still make a sizeable profit on the sale. On the other hand, perhaps the housing market is down, or you haven't had the house that long and your equity is not substantial. It may be wise to refinance or secure other funding, and make the repairs now before the situation worsens. Can You Expand? Quite often, the reason people want to move is because the house is simply too small to meet their current needs. If that's the case, and if you like the neighborhood and like the house in general, you might want to consider adding on. Room additions can make a huge difference in the size, layout and livability of any home, provided they are done correctly. Take a good look at your needs, and what you have to do to meet them. Do you have the room to add onto the side or rear of the house? Can you add a second story? Are their city, county or homeowner's association restrictions that will limit your ability to expend sufficiently? Remember that as much as you love a house and a neighborhood, and as much as you would like to stay in it, remodeling is not always the answer. No matter how good your contractor is, remodeling will not increase the size of a small lot, it won't add a wood shop in a neighborhood that doesn't allow them, and it probably won't be able to alleviate major flaws in room layout. Beware Of Overbuilding Suppose you are considering adding 500 square feet to your 1,000-square-foot home. If your entire neighborhood consists of 1,000-square-foot homes, you may be overbuilding for that neighborhood. For some people, overbuilding is a serious consideration, since part of the reason for the improvement is to make the house more valuable, and to hopefully see a return on your home improvement investment. For others who are primarily interested in creating a home that meets their needs and that have no plans to sell the house in the foreseeable future, overbuilding may be very much a secondary consideration. Overbuilding is not limited to additions – it can apply to everything from upgraded roofing materials to kitchen remodels to extensive landscaping. You need to take the neighborhood into consideration, the general housing market, your future plans, and even your relationship with your neighbors. Get That Homework Done If the time seems to be drawing near for making the decision to move or improve, do your homework first. Look at what your neighborhood is doing, and what housing prices are. Talk with a trusted real estate agent, and consider an independent market appraisal of your home. Consider paying a general contractor a consultation fee to discuss your home's general condition, and the cost of potential improvements. And be sure you don't ignore municipal and homeowner's association requirements and restrictions as part of your fact-finding.
Should I hold out for a higher price? Some sellers learn that's not always the best strategy By Dian Hymer It's not unusual for sellers to have an over-inflated opinion of the value of their home. Often this comes from pride of ownership, which is not a bad thing. Homeowners who take pride in their homes usually keep them well maintained. This preserves the value of the property. Sometimes, however, pride of ownership can get in the way of making a rational business decision. Recently homeowners put their Oakland Hills, Calif., property on the market with expectations of a high selling price. To encourage competition, they listed it for $759,000, which was a price that was lower than they were willing to accept. They received an offer soon after they listed for $785,000. The sellers rejected the offer because they wanted more than $800,000. Subsequently, the property languished on the market. Finally, it sold, after the price was reduced to $739,000. Another seller countered an excellent offer that he received soon after listing. He was also hoping for a higher price. Months later he ended up selling for $50,000 less than he would have if he'd accepted the first offer. It has often been said that the first offer you receive is likely to be the best one you'll receive. While this saying doesn't hold every time, it does contain a kernel of truth. Your best chance of selling your home for the highest price is when it's new on the market. If a property is priced right for the market, and the market is active, you might receive an offer, or offers, within the first several weeks of marketing. Buyers tend to make aggressive bids for high-demand listings in order to beat the competition. After your home has been on the market for a period of time with no offers, you are less likely to receive aggressive bids, unless the market changes in your favor over time. However, if the market is steady or slows, you could find the appeal of your home diminishing over time. This usually equates to fewer offers at lower prices. Buyers typically ask how long a listing has been on the market and discount their offer prices accordingly. HOME SELLER TIP: You're taking a gamble when you turn down a strong offer from a well-qualified buyer. If you wait, you might not see as good an offer later. If word gets out that you rejected a good offer, this could discourage other buyers from making offers. They may wonder if you're serious about selling. Just as it's risky to turn down a good offer in hopes of something better, it's also risky to accept an offer before your home has been exposed to the market. If your home is priced at or under its market value and it hasn't been adequately marketed, you could shortchange yourself. Before you sign a listing agreement make sure that your real estate agent will provide you with an aggressive marketing program. You want as much exposure for your home as possible, as quickly as possible. If your home is priced right for the market, and it receives comprehensive marketing, you should feel confident that the offers you receive reflect the current market value of your home. If after professional marketing exposure, you receive an offer or offers that are less than you had hoped for, you may need a reality check. Your pride of ownership could be clouding your judgment of current market conditions. THE CLOSING: Your home is only worth what a willing and able buyer will pay for it in the current market.
Questions every buyer should ask Take this checklist along when you visit a home and talk to the listing agent. Make note of your own observations, watch for defects, and ask about anything you may not see on your own. § What is the visible condition of the property? Poor exterior condition may spell problems inside. § Does the house require major repairs or replacements? Major repairs, such as a new roof, can be costly. Consider these costs if you decide to make an offer. § How old are the mechanical systems? Consider the cost of replacing older systems if you decide to make an offer. § Has the house been well maintained? Ask if the sellers have kept any maintenance records. § Where is the house located on the block? Corner lots can be spacious, but exposed to more traffic and noise. Interior lots can be quieter but too close to neighbors. § How is the house sited on the lot? Be sure the area around the house is graded properly to provide good drainage. § Are there noteworthy architectural features? Front porches, gables or other details add value to the property. § Are there noteworthy landscaping features? Established trees, shrubbery and perennials add value to the property. § What is the condition of the houses on either side and across the street? If neighboring properties are too run-down, they may affect your resale value. § What is the surrounding neighborhood like? Look for evidence of a sense of identity, and pride of ownership in the other homes. § How close is it to shopping and schools? Nearby services can also add value. § Are there community amenities nearby? Parks or recreation centers can add value to the property. § How long has the house been on the market? A long time on the market may indicate problems with the house or neighborhood that you need to know. § Why does the seller want to sell? If there's a problem with the house or the neighborhood, assess the situation carefully.
Which mortgage is best? By Dian Hymer It's a great time to shop for a mortgage. Mortgage money is plentiful. Lenders are anxious to lend. And interest rates are at a multi-decade low. Thirty-year fixed rate mortgages in the 6 percent range are popular with today's borrowers. So are15-year mortgages at less than 6 percent. Five-year fixed/AMR loans for only 5.5 percent are hard to refuse. Or should you go with an ARM (adjustable rate mortgage) with a start rate of 3.95 percent? With so many mortgage alternatives available, how do you decide which one is right for you? Here are a few guidelines to help you decide: If you are buying or own a home you plan to live in indefinitely, a 30-year or a 15-year fixed rate mortgage are the most attractive options. With both options, the monthly mortgage payments are fixed for the life of the loan, which gives you payment security. The monthly payments on a 15-year loan are higher than they are on a 30-year, so you need more income to qualify. But if you can qualify, you'll own your home free and clear of a mortgage in just 15 years. And the interest savings is huge. The interest rate on a 15-year mortgage is about 1/2 percent lower than it is on a 30-year loan, plus you pay less interest over time—about $100,000 less on a $200,000 mortgage. A disadvantage to some borrowers is that you lose a tax deduction when your mortgage is paid off. One advantage of a 30-year mortgage is lower monthly payments, which makes qualifying easier. A 30-year mortgage also offers more flexibility, particularly if you take out a mortgage that charges no penalty fees for early prepayment. Let's say that your income is sporadic. When you receive a bonus, you can pay down the principal balance to reduce your interest expense. But when cash is in short supply, you can stick with the manageable 30-year amortized payment. With a 15-year loan, you're stuck with the higher payment regardless of your cash flow situation. HOUSE HUNTING TIP: Even though low interest rates make fixed-rate financing the most popular choice, ARMs may be preferable for some borrowers. If you're sure you'll be moving again within five years, you'll probably save money with an ARM that is fixed for five years at a lower interest rate than either a 30- or 15-year fixed loan. After five years, the mortgage converts to an adjustable. ARMs with interest rates that adjust from the get-go aren't too popular with most borrowers today because interest rates are expected to rise when the economy gathers steam. But if you are trying to keep your monthly payments as low as possible, this could be the right choice for you. Let's say you bought your home a year ago when you and your partner both had good incomes. One of you lost a job and you're trying to survive on one income. Refinancing a higher interest rate fixed mortgage into an ARM that offers several payment options could be the answer to your short-term cash flow situation. ARMs that allow negative amortization also offer the borrower several payment options. Negative amortization occurs when the payment doesn't cover the interest owed. When this happens, the unpaid interest is added to the principal and your loan balance rises. You can avoid negative amortization by making the fully amortized payment or the interest-only payment amount. But if you're short on cash, you can make the minimum payment due. THE CLOSING: Before you sign up for an ARM with negative amortization, make sure you understand how the loan works, and be diligent about paying any deferred interest as soon as you are able.
Should home seller fix a defect, credit money or lower the price? By Dian Hymer Inspections invariably reveal defects. Often, buyers and sellers find themselves back at the negotiation table trying to work out an agreeable solution. Determining who is going to pay for what is one part of the resolution process. The other is figuring out how and when the defects will be repaired. There are three options. The seller can do the work before closing. The seller can credit money to the buyer at closing and the buyer can take care of fixing the defect later. Or, the seller can reduce the purchase price by the amount of the negotiated resolution. There are advantages and disadvantages to each approach. For example, if the sellers agree to repair a defect before closing, the work is done. The buyers don't have to worry about fixing a problem after they take possession. A disadvantage is that there may not be sufficient time to complete the work without delaying the closing. Also, the sellers, who are moving on, may not take the same interest in overseeing the work as the new home owner might. A related issue is that the sellers may agree to complete only the bare minimum to get the job done. If the buyers prefer to upgrade the work project, they should consider taking a credit at closing. In cases where the seller is completing work before closing, the buyers should ideally have the right to reasonably approve the work order before the job is done. The seller should provide a copy of a paid invoice when the work is completed. The buyer should also make sure that the contractor who is performing the work will guarantee his work for the buyers as well as the sellers. This is so that the buyers can turn to the contractor, and not the seller, if there is a problem with the job after closing. HOUSE HUNTING TIP: Sellers often prefer to credit money to the buyers at closing to satisfy inspection-related issues. This relieves them of the responsibility for having work done while they're in the midst of moving. If you're having trouble convincing a seller to repair defects, you might make headway by agreeing to accept a credit in lieu of an actual repair. A credit for defects can be a cost-effective way to solve a problem if the buyers are planning a larger renovation. For example, it would be a waste of money for the seller to repair a shower if the buyers plan to completely remodel the bathroom. In this case, a credit would benefit both parties. Also keep in mind that there are often several ways to fix a property problem. Who better to decide how to fix a defect than the new owners? Just make sure if you do take a credit that you follow through and have the work done. Also, be sure to check with your lender before finalizing your negotiations with the seller. Lenders have limits on how much money they'll allow a seller to credit to a buyer at closing. Credits generate cash to repair defects, which works well for buyers who are cash-strapped. Buyers for whom cash isn't an issue might prefer a reduction of the purchase price. A lower price can help both buyers and sellers if there are closing costs that are based on the purchase price, such as transfer taxes and title insurance. THE CLOSING: In areas where property taxes are based on the purchase price, a lower price could result in a sizable savings over time.
Spotting water damage before it's too late By Paul Bianchina Water is one of those seemingly innocent things around the house that gets underestimated in its potential to do damage. A trap that's not tight, a toilet seal that's lost its grip, a water line with a tiny drip - it's not much water and it's hard to see or hear, but every day it continues it has the potential to wear away structural members, cause mold growth and create a number of problems for you and your home. For the most part, though, water leaks leave their warning signs, so you need to be aware if your home is using any of the following visual clues to try and warn you. STAINS The most obvious water leak indicator, other than standing water, is a water stain. Stains may appear: Around windows or the bottom of exterior doors, indicating that water is entering from the outside; At the joint between the ceiling and an exterior wall. This could be an indication of a roof leak, but in this location it probably indicates an ice-damming problem. Anywhere else along the ceiling. Unless you have water lines that run in the attic, which is pretty uncommon, a ceiling stain almost certainly indicates a roof leak. Remember, that the location of the stain does not necessarily mean the roof leak is right above it – it usually originates higher up and drips down. In cabinets: If you see a water stain or a whitish ring on the floor of a cabinet that houses a sink, it's probably a sign of water leaking from the trap, or from somewhere else in the sink's drain system. Mold and mildew stains: If you see mold or mildew growing, it's an obvious indicator of a moisture problem, but not necessarily an actual water leak. In a bathroom, it usually means there's inadequate ventilation to rid the room of moisture. At the bottom of an exterior wall, it might mean ground water from sprinklers or other sources is coming in. In a closet, behind a bed, or in other areas with little or no air circulation it could mean a variety of things, most likely an overly damp crawl space. STRUCTURAL INDICATORS One common indicator of the presence of water is a floor that begins to buckle slightly, with hills and valleys. Vinyl floors are typically laid over particleboard underlayment, which absorbs water like a sponge and then swells up. Hardwood floors will show water by cupping up around the tongue-and-groove joints. Common floor areas to keep an eye on for potential water problems are in the kitchen around the dishwasher, where there is both a water supply and a drain line that can leak, and around refrigerators equipped with ice-maker lines. In the bathroom, pay close attention to the floor around the toilet. If the wax ring deteriorates over time, water can leak out around the base of the toilet onto the floor. The worst area in the bathroom is in front of the tub or shower, where water damage can occur from splashing, partially-opened shower curtains, shower or tub doors that don't seal completely, and especially from people stepping out and dripping water on the floor. This is a very typical area in a home to find water damage and dryrot, so keep a very close eye on these areas and act quickly if you see any stains or evidence of buckling. With repeated exposure to water, drywall will soften and break down, so here's another indicator. The drywall will usually take on a discolored and slightly swollen appearance, and will gradually soften until you can put your finger through it with just a slight amount of pressure. Drywall indicators are usually found in the same areas as the water stains and buckled floors mentioned above. Pay particular attention to the drywall near the floor around toilets, and also down in the corners near where the bathtub or shower meet the floor. WHAT TO DO, WHAT TO DO At the first indication of a water leak, make it an absolute priority to locate and deal with the water source. It may be obvious – a wet patch under a dishwasher and nowhere else in the house would make a pretty strong case for a leak in that appliance – or it may be a stain or a patch of mildew that could be coming from a variety of sources. If you are unable to locate the source of the water leak yourself, get some help from a pro. Companies that specialize in water damage restoration have very sophisticated and accurate water detection meters that can locate the presence of moisture in a wide variety of materials, and in otherwise concealed areas. Check the Yellow Pages under "Water Damage Restoration," "Fire and Water Damage Restoration," or "Carpet," or ask your insurance agent for recommendations.
Strategies for changing real estate markets By Dian Hymer It appears that the home sale market in some areas may be changing from a hot seller's market to a more balanced market. A balanced market is one in which neither the buyer nor the seller has the upper hand. When this sort of shift in home sale market occurs, you usually find a larger inventory of homes of sale. Therefore, it generally takes longer for homes to sell, there are fewer multiple offers and fewer listings sell for more than the asking price. As the inventory of homes on the market increases, buyers have more to choose from. Given more choice, buyers tend to be pickier. For instance, a home with freeway noise—that might have sold quickly, maybe even with multiple offers in a strong sellers market—could take longer to sell in a more balanced market. Sellers should tone down their expectations as the market shifts. With more inventory on the market, pricing your home for sale will be critical. Why should a buyer pay more if there are other more reasonably priced listings to choose from? HOUSE HUNTING TIP: Buyers that are contemplating trading up to a larger home or down to a smaller home should carefully consider whether it's better to buy the new home or sell the old one first. In a hot seller's market, there's less likelihood that your home would sit on the market unsold for long. When the market shifts, and it starts taking longer to sell, it may make more sense to sell first, particularly if you're stretching financially to afford the next home. You never know exactly how much your home will sell for until you've found a buyer and you've worked through any inspection contingencies. In a market that's racing higher price wise, this is less of a concern. When the market slows, you may not be able to count on a quick sale and numerous over-list price offers to choose from. If you need every dime out of your house to make the move, you should carefully consider selling first. Then you'll know exactly how much money you have to invest in the next home. In general, buyers should find less competition. This doesn't necessarily mean there will be no competition. This will depend on where you're buying and in what price range. Usually, there are fewer buyers in the higher price ranges. Recently, buyers who had looked for months for a home were the successful bidders on an attractive listing. There was only one other offer. Months earlier, when the inventory was scant, these same buyers lost out in a multiple offer competition. Six other buyers bid on the same property. The recent increase in interest rates has been a major factor in the changing market. When rates first started up, buyers rushed into the market. A buying frenzy ensued. This pushed prices up to record highs in some places. As sellers became convinced that the good times wouldn't last forever, many decided to sell. And, the inventory of homes for sale grew. A dilemma for many buyers is this. Since more listings are coming on the market, do you wait to buy until something you like better comes along? Or do you buy now to lock in an interest rate that is likely to be lower than it will be in the future? THE CLOSING: The best strategy is to buy when you find the right house. And beware of unrealistic sellers who are only interested in selling if they can get an astronomical price.
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.

Features

What are the benefits of piggyback financing? By Dain Hymer When a buyer puts 10 percent or less cash down, most lenders require mortgage insurance, known as PMI, which is paid for by the buyer. The cost of PMI is about 1/2 percent of the loan amount annually. So, on a $250,000 mortgage, PMI will run about $1,250 per year. PMI provides protection for the lender in case the buyer stops making mortgage payments. Buyers don't like PMI because it increases the cost of home ownership. Currently, unlike most mortgage interest paid on a primary residence, PMI is not tax deductible. Low-cash down buyers can avoid PMI by using piggyback financing. Here's how it works. Let's say you have enough cash to put 10 percent down on the purchase of a new home. If you borrow a mortgage for 90 percent of the purchase price, the lender will likely charge you for PMI. Instead of taking out one mortgage, you combine two mortgages to come up with 90 percent financing and thereby avoid PMI. You could combine a 75 percent first mortgage with a 15 percent second mortgage. Or, you might combine a 70 percent first with a 20 percent second mortgage. You could save as much as $100 to $150 per month using piggyback financing, depending on the size of the loans involved. You might wonder why anyone would choose to do financing that requires PMI. For some buyers, there's no other choice. Piggyback financing requires good credit. Second mortgage lenders can be stricter than first mortgage lenders in their qualifying criteria. Typically, borrowers need a credit score of 660 or more to qualify. Recently, piggyback financing has increased in popularity, even with buyers who have a substantial cash down payment. Many large cash down buyers are electing to establish an equity line second mortgage in order to have access to cash on a moment's notice. There's often no charge for initiating the loan. The annual fee should run around $75. You're only charged interest when you write a check against the credit line. The interest rate is often tied to the Prime Rate. And you can usually make interest only payments for up to 10 years. HOUSE HUNTING TIP: Piggyback financing can be used effectively as interim or bridge financing if you buy a new home before you've sold the old one. Recently a trade-up buyer had enough cash to put 15 percent down on her new home. For the long term, she wanted to have a first mortgage of no more than 60 percent of the purchase price. She borrowed a 25 percent equity line second mortgage to make up the difference. During the period of time that she owned two homes, she made interest only payments on the equity line in order to keep her carrying costs down. When her old home sold, she paid the equity line on her new home down to a zero balance. However, she didn't close out the equity line. She retained it in case of an emergency. Note that some equity lines do charge an early closure fee during the first few years of the loan. However, if you pay the equity line to a zero balance, but don't close it, there shouldn't be a closure fee. As long as you qualify, you can borrow up to $500,000 on an equity line second mortgage. And, you can use piggyback financing to finance up to 95 or 100 percent of the purchase price. THE CLOSING: By using an equity line second mortgage for your piggyback financing, you can achieve a lower blended mortgage rate because the interest rate on an equity line is often substantially lower than it would be on a conventional mortgage.

Home permit history comes back to haunt By Dian Hymer Home inspectors often recommend that the buyer obtain a permit history on a home they want to buy. However, most buyers don't heed this advice, which can lead to problems later. One homeowner who didn't check the permit history before she bought found out after closing that a remodeling permit issued in the seller's name had never received final city approval. She discovered this when her contractor applied for a permit to do some more remodeling. The city wouldn't issue a new permit until the outstanding permit received a final clearance. When the city inspector checked the work, he refused to pass it because it hadn't been done properly. The homeowner had to make the corrections before the city would issue a permit for any further work on the property. This was an expense she hadn't anticipated, and it delayed her remodeling. Another homeowner converted a detached cottage on his property to a bedroom and bathroom for his daughter. This work was done by licensed contractors, but without a building permit. When the homeowner listed his house for sale, a neighbor reported the illegal living unit to the city planning department. The city issued a violation notice to the homeowner. When the buyers were told of this, they insisted that the homeowner bring the unit into compliance with city requirements. The unit was so close to the property line that it was impossible to make it legal. The only way to comply was to remove the structure. Homeowners often do work without permits to save money. However, this can end up costing more in the long run. For example, one couple that had outgrown their home hired a contractor to do a major addition that virtually doubled the size of the house. To save on the permit application fees, the homeowners asked the contractor to skip the permit process. Later, when the home was sold, the appraiser for the buyer's lender refused to give full value to the addition because the work was done without permits. To save the sale transaction, the sellers had to apply for permits after the fact, which meant paying penalties in addition to the permit application fees. HOUSE HUNTING TIP: You may have to visit the municipal building or planning department to search the permit record of a home you want to buy. But, even though this takes time, it should be included in your due diligence investigations of the property. It's particularly important to check the permit history if you're buying a property that's advertised as having a rental unit that generates income. If you find out later that the rental unit wasn't done with permits and in compliance with building code requirements, you might lose an income stream that you were depending on. If you're buying a home that has been remodeled over time, there's a good chance that some of the work was done without permits. It's a good idea to ask sellers if all work was done with permits. In some states like California sellers are required to disclose any work that was done without permits. However, in some cases, the sellers may not be aware that work was done without permits. Sometimes contractors don't take out permits to save time. So, it's important to check this. Before you buy a home where work has been done without permits, make sure you understand what the future consequences might be. If you search the permit record during your inspection contingency time period, there's an opportunity to negotiate a satisfactory resolution to permit issues before you close. THE CLOSING: Otherwise, you may be stuck with fixing a problem at your own expense.

What are the risks of remodeling without permits? By Dian Hymer Most cities, by law, require homeowners within their jurisdictions to apply for building permits before making modifications to their homes. Precisely what projects require permits varies from one city to the next, as does the vigor of enforcement. Fees are charged when a building permit is issued. A value is attached to the improvements which often triggers an increase in the assessed valuation of the property. So, work done with a building permit can result in an increase in the homeowner's property taxes. The permit process can also involve inspections to make sure that work is done correctly and in compliance with relevant building codes. Depending on the building department, scheduling inspections can be a hassle. And waiting for inspectors takes time. In order to save time and money some homeowners and contractors skip the permit process. However doing work without a permit can have serious consequences. One East San Francisco Bay homeowner hired a contractor to convert a shed to a studio apartment for his daughter to live in. The contractor did the job without a city building permit. When the property was sold, the seller disclosed to the buyer that the work was done without a permit. California law requires that homeowners disclose to prospective buyers any work they have done without a permit. Before going through with the sale, the buyers talked to a city building inspector to find out what it would take to make the converted shed into a legal structure. Unfortunately, the structure was so far from complying with the building code that the only economically feasible alternative was to tear it down. Consequently, the seller had to lower his price to reflect the loss of the apartment and the cost of demolition. FIRST-TIME TIP: Before you commit to buying a home, it's a good idea to get a history of the permits on the property from the city building department. If permits for significant work are missing, ask the sellers for an explanation. Also, find out what impact this might have on you. You may incur costs in the future if you buy a home that was renovated without permits. For example, let's say you that plan to remodel the kitchen and you plan to obtain the required building permits. If a city building inspector finds code violations from past work when he's inspecting your kitchen remodel, you may have to correct these violations before the inspector will sign off on the kitchen project. You might also be liable for penalty fees. Appraisers often want to know that significant renovations were done with building permits. One couple found this to be the case when they sold their home in the Oakland hills. They had added a bedroom, a bath and a family room without permits. The addition doubled the square footage of the house. Without permits, the appraiser wasn't willing to give full value for the improvements. So the property appraised for significantly less than the purchase price. To keep the sale from falling apart, the sellers took out permits which involved paying penalties. In order for the city inspector to confirm that the work was done properly, some walls had to be opened to expose plumbing and electrical work. The sellers' efforts to save money by bypassing the permit process ended up costing them much more in the long run. THE CLOSING: Don't be lulled into a false sense of security if you discover that the building department isn't currently enforcing the permitting process. This policy could change in the future.

Should I buy real estate at the top of the market? Long-range buyers may have the upper hand By Dian Hymer Buying a first home is a scary experience. It's easy to imagine the worst. How will I know a good house when I see it? What if I buy a house I can't sell? How can I make sure I'm making a good investment? What if I pay too much and home prices drop? After years of hefty home-price appreciations, it's natural to wonder how long the good times will last. Real estate markets are cyclical: prices go up and they go down. However, over the long term in this country, prices have tended to move higher. At the end of the 1970s, after a big run up in home prices, real estate agents had a hard time believing that prices could go any higher. The market did cool in the early 1980s. But today home prices are three to four times higher than they were then in some parts of the country. HOUSE HUNTING TIP: To protect yourself when you buy a home, adopt a long-range horizon. Don't buy unless you plan to hold the property for at least 5-10 years. This way you can ride out any downturns in the market and sell when the market improves. Try to avoid getting into a situation where you are forced to sell in a down market. If you have any questions about how long you'll be staying in the area, postpone your buying plans until there's more certainty in your life. For the buy and hold strategy to work you need to make sure that the home you buy will suit your long-term needs. This usually means: don't buy a home that's too small. Many first-time buyers make the mistake of buying a tiny starter home because it's charming and it's in the right neighborhood. But, two bedrooms, one bath and a postage-stamp lot doesn't leave much room for growth. A better strategy might be to buy on the outskirts of a prime neighborhood where you can buy a 3-bedroom, 2-bath home for the approximately the same price. You might not have the most prestigious address today, but you could experience good appreciation, which will finance your trade-up move. And, you'll be comfortable in the mean time. One first-time buyer complained that in her price range, she could only afford to buy a 1,500-square-foot house. It's nice to have more square feet: to a certain extent, the bigger, the better. However, a well-designed, 1,500-square-foot home can be a very comfortable place to live. Some floor plans are better than others. Ideally, there should be good flow between the rooms. A home with a central hall that leads to many rooms usually is easier to live in than one that's laid out like a train where you have to pass through rooms to reach other rooms. Good indoor-outdoor living makes a big difference. A deck or patio off the kitchen, family room or dining room provides additional usable space and makes the home feel larger. Some buyers put off their home buying plans for fear that the real estate market will fall. This seemingly sane strategy can be risky if prices don't drop. You could be kicking yourself next year when you haven't bought and home prices are further out of reach. THE CLOSING: On the other hand, there's usually no need to rush to buy in a market that's bloated with inventory, particularly if new housing developments are in the works. An over-supply of housing relative to buyer demand puts a downward pressure on home prices.

Age of home may be a mystery Dear Barry, The house I'm buying is quite old, and I was hoping that my home inspector could determine what year it was built. His best estimate was about 60 years, but I'd like a more definite disclosure. How can I obtain this information? --Julie Dear Julie, Home inspectors generally estimate the approximate time a home was built and are often able to determine within a year or two the precise date of construction. But the accuracy of such assessments depends largely upon available evidence. Manufacture dates on plumbing and mechanical fixtures often provide reliable clues to structural vintage, but these indicators may or may not be present in a given dwelling. For example, if a home still has an original toilet, the date of its manufacture is likely to be found on the inner wall of the tank or on the underside of the tank lid. Often, however, older toilets have been replaced with newer models, for the sake of water conservation. In old homes, such as yours, dates can also be found on the under-surfaces of some bathroom sinks. And in later model homes, usually those built after World War II, there are also manufacture dates on the fuel connectors to gas-burning appliances. If the fixtures in your home do not provide such clues, check with your local building department. Their records may indicate the date of construction. You might also consult the local tax assessor's office. Sometimes their documents indicate when a property began to be taxed as improved real estate. If these avenues lead to dead ends, see the reference librarian at your local library. There may be some useful public records, such as old arial photographs of the neighborhood. If you can find photos taken just before and just after the house was constructed, you will have found the answer to your question. Dear Barry, The former occupants of my condo laid indoor-outdoor carpeting on the concrete walkway that leads to my house. It became water stained, worn, discolored, and shabby. When removed, it left patches of glue on the pavement, which is even more unsightly. What can be done with this stuff, and who does this kind of removal? We can't seem to find a handyman who even wants to try. --Dorothy. Dear Dorothy, The residual carpet adhesive may require some concerted effort to remove, which may be why no one is anxious to undertake the task. However, the material should be removable with aid of a chemical solvent, a wire brush, a scraping tool, and a few hours of energetic persistence. As to who might be interested in the job, call a few real estate offices and ask if they can recommend a fix-it person. Realtors often employ people who perform miscellaneous repairs and should be able to give you some good leads. To write to Barry Stone, please visit him on the Web at www.housedetective.com. Copyright 2003 Barry Stone Distributed by Inman News Features

Barry Nordendale REALTOR® Coldwell Banker C&C Properties 2120 Churn Creek Redding,  CA  96002 509.351.1823 barry@reddinghomeprices.com

Your Newsletter is Powered by: