In-Depth Real Estate Guide
This resource covers a lot of ground about buying and selling real estate.
Look for the area you have questions about and dig in!
After You Move In
The First Week
– Install new locks.
– Make extra sets of keys.
– Buy a fire extinguisher for the kitchen and garage.
– Install or check the batteries in the smoke detectors.
Keep Your House In Shape
– Make repairs and do preventative maintenance as needed early on.
– Keep an eye open for termite droppings and wet wood conditions.
– Keep rain gutters and downspouts working properly to drain water away from the house.
Home Safety Check List
– Install good sturdy handrails.
– Service all heating equipment.
– Install carbon monoxide detectors.
– Use anti-skid material under area rugs.
– Install smoke detectors in key locations.
– Install an automatic night light outside bedrooms.
– Keep fire extinguishers handy in the kitchen and garage.
– Keep medicines, poisons, and firearms in child-secured cabinets.
– Properly store paints, solvents and gasoline in a well-ventilated area.
– Provide rope or chain ladders on upper stories if there is no fire escape.
– Install ground fault circuit interrupters (GFCI) in bathrooms and by the kitchen sink.
– Food for a week.
– Bleach to purify water.
– Camp stove and extra fuel.
– Fire extinguisher and first aid kit handy.
– Know where to turn off gas and water mains.
– Water: 1 gallon a day per person for at least three days.
– Keep flashlights, spare batteries, matches and candles in a special drawer.
Start A House File
Keep all important house-related papers, title insurance, loan information, property insurance, etc. in a central “house file” system.
Important: save all receipts for any home improvements for later “possible” tax write-offs.
Thinking Of Adding On?
– Always get permits.
– Don’t over-improve relative to the neighborhood you are in.
– Use professionals to maximize your investment.
– Addition should blend well with the existing architecture.
Well-planned and executed remodeling jobs are a good investment and some specific home improvements even can increase the value above the initial cost. Any owner contemplating an addition and/or change to his or her property should first check with the appropriate county or municipal building department to avoid any building code violations, which will generally render a seller’s title unmarketable. In addition a seller’s failure to disclose such violations (they have knowledge of) may constitute a material misrepresentation, entitling the buyer to rescind the transaction and obtain the return of his or her money.
What Makes More Sense – Adding on or Buying a Bigger?
Homeowners should consider several questions before making a choice between adding on to an existing home or moving up in the market to a bigger house.
– How much money is available, either from cash reserves or through a home improvement loan, to remodel the current house?
– How much additional space is required?
– Would the foundation support a second floor?
– What do local zoning and building ordinances permit?
– How much equity already exists in the property?
– Are there affordable properties for sale that would satisfy housing needs?
Consider limitations of your neighborhood. It makes more sense to add on to the smallest house than to further improve the largest one in the area.
Ultimately, the decision should be based on individual needs, the extent of work involved and what will add the most value.
Choosing a Reliable Contractor?
Never hire a contractor without first taking the following 9 steps:
1. Call the State License Board to verify the license number of the contractor. And ask the board if there are any outstanding complaints against that license holder.
2. Contact your local Better Business Bureau to see if there are any complaints on file.
3. When interviewing, ask prospects about their workman’s compensation insurance.
4. Get the policy number and phone number of the insurance carrier. Call to be sure the contractor is covered. If he or she is not, any work-related injury on your property could become a liability to you.
5. Check to see that the contractor has an umbrella general liability policy.
6. Always ask for references.
7. Always take the time to call and verify them.
8. Do not give in to pressure to make a decision. Believe it or not, there are more contractors than there is work to be done. If a contractor insists that you make a quick decision, move on to someone else.
9. Never pay a deposit to a contractor. If you are asked to pay a deposit fee at the first meeting, simply end the meeting.
Special Government Programs for Rehab?
HUD’s Rehabilitation Loan Program, Section 203 (K) is designed to facilitate major structural rehabilitation of houses with one to four units that are more than one year old.
Condominiums are not eligible.
The 203 (K) loan is usually done as a combination loan to purchase a fixer-upper property “as is” and rehabilitate it, or to refinance a temporary loan to buy the property and do the rehabilitation. It can also be done as a rehabilitation-only loan. Plans and specifications for the proposed work must be submitted for architectural review and cost estimation. Mortgage proceeds are advanced periodically during the rehabilitation period to finance the construction costs.
At this time, only select lenders are participating.
For a lender list, call HUD.
Some Home Improvement Expenses are Tax Deductible.
Mortgage interest payments on acquiring and improving a principal residence are fully deductible from income for tax purposes In addition, expenditures for permanent improvements can be added into your home’s cost basis, or amount of money invested in a home, which reduces capital gains.
Save all receipts of money spent for permanent improvements, repairs after a fire, flood or storm and special property tax assessments for neighborhood improvements.
Capital gains are determined by the difference in price from the time a home is purchased and the time it is sold, minus the cost of any permanent improvements.
Thinking Of Refinancing?
– Don’t list your house for sale if you are thinking of refinancing.
– Lenders usually require your house not to be listed in the recent past.
– Appraisers are required to make such disclosures if known.
– Keep Your Insurance Up To Date
– Keep records of any improvements as you have them done.
– Keep in a binder, receipts and owner’s manuals of any equipment you buy.
– Take photos or videos of all your rooms and keep them in a safe place.
– Property values can rise dramatically in just a few years which is why it is important to have replacement cost insurance. Should you have a theft or fire, these will be very valuable for claims.
Know Your Neighborhood
After you are settled in, introduce yourself to your neighbors and invite them over.
Most people want to know who their neighbors are, but most are shy about making that
Break the ice first and introduce yourself.
Get involved in the neighborhood watch program. In areas of high crime, community watch programs organized by homeowners can lower the crime rate and rid a neighborhood of graffiti. These improvements also can enhance property values.
Knowing your neighbors is why people enjoy living where they live.
Before You Buy
Before you buy real estate, educate yourself about what’s involved.
Things to Consider:
Planning to move out of the area in just a couple of years? If so you may be better off not buying a home now. The cost of selling a house generally falls in a range of 7% – 8% of the sale price which may be more than the appreciation of the house.
Thinking about changing jobs? It might be best to wait until after your purchase.
Look at your work history. Is it sporadic or did you just start a new job? Lenders like to see someone with a steady work history and with job changes in the same line of work.
Lenders will require your work history along with past tax returns.
Look at your credit report before you go to a lender. It is not uncommon to find problems with reports, especially if you have a common last name. If you find a problem, start with the reporting agency to clear it up. It is common to have a late payment at some time or another. These problems can usually be taken care of with a letter of explanation from you to the lender.
Banks/Savings and Loans vs. Loan Brokers
Loan officers at a bank work for the bank.
Loan brokers work for you and have a fiduciary relationship.
Most banks cooperate with loan brokers.
You can go to a broker and obtain a loan through a bank.
Most banks will offer you a menu of programs while a loan broker will offer a menu of lenders. Banks and loan brokers are under different government controls.
A complaint regarding a bank would go to the State Department of Banking.
A complaint regarding a loan broker would go to the State Department of Real Estate.
Contact someone from each source to see what special programs they have to offer.
Before shopping for a home, get pre-approved for a loan first.
Getting pre-approved for a loan is a necessary step when buying real estate.
If you are pre-approved first you will save considerable time looking for a property.
You will know how much a lender will commit so you won’t waste time looking at property you can’t qualify for.
You will have a better chance of having an offer accepted if it is accompanied with a pre-approval letter. The best agents won’t work with buyers until they are pre-approved.
A lender will let you know your maximum loan amount after providing them:
– Income from all sources.
– Funds available for a down payment and closing costs.
– Your monthly obligations (auto loans, credit card payments, alimony, child support)
– Price range of homes where you want to locate.
Selecting a Lender
You should pick a lender based on experience, customer service and recommendations. Work with a lender who is experienced in the business knows the availability of the different type loans and how to handle the demands of processing. Don’t make the decision based solely on which lender is offering the lowest rates. If a company is offering a mortgage package that is well below market rates, you should beware.
All mortgage companies generally choose from the same pool of investors.
A company offering abnormally low rates might make up the difference by increasing closing costs or tacking on additional settlement fees.
Determine how long you expect to live in the new home. This decision will not only affect the houses you look at, but also will determine the type and term of loan you choose.
Get everything in writing and a copy of everything you sign.
Ask your lender at application what fees typically are included in the finance charge computation, and what fees may be charged separately at closing.
How Much Can I Qualify For?
Most lenders require your housing payments not to exceed 25-33% (depending on your down payment) of your gross monthly income called “housing expense ratio”.
Your total debt payments should not exceed 33-38%, figured on a monthly basis.
This figure is called your “total debt ratio”.
Use the mortgage calculators to find out how much you can afford.
How Much Do I Need?
Besides setting aside money for a down payment, you will need money for closing costs. Those costs can range from $3,000 to $10,000, depending on the type of loan, the loan fees and the community the property is located in.
See Buyers Closing Costs to help determine costs.
The smartest and most time-efficient thing to do is get pre-approved upfront, before you start looking for a home.
Next, find an agent familiar with the area you want to live and you are comfortable with.
Educate yourself about local property values and the current market trend.
To find out what prices homes are listed for in the South County area, get signed up with Listing Alert. Once you submit the information, new MLS listings will automatically be emailed to you as soon as they come on the market.
Before You Close
Don’t Jeopardize Your Loan
Taking out another loan, buying a car, or making large credit card charges before you close can jeopardize your loan commitment. Lenders run a second credit check prior to closing to check for new charges.
Time to Close
Closing at the beginning of a month, the lender will require you to “prepay” the interest on your loan from the day of closing to the end of the month. Therefore the cash you need to close will be more than if you close at the end of the month. Talk with your lender about this.
It’s common for buyers to feel stressed or remorseful during and after the purchase of a home, Educating yourself about the buying process will help minimize “buyers remorse”.
You will probably forget it soon after you move into your new home.
Notify Services & Utilities
Don’t forget to contact services such as post office, insurance, movers, telephone, utilities, newspaper, etc. a few weeks prior to you moving out to “change over” billing/mailing addresses.
>> Request Your Free Service Provider List from us here
Arrange for Mover
Get a couple of written estimates from movers on the services they provide for the costs of your move. Check the local Yellow Pages and search to get quotes and contacts.
Do a final walk-through as close to the sign-off as possible.
Check appliances for operability. Test outlets with a radio or test device. Turn on light switches. Check water faucets and toilets.
Make sure promised cleaning and repairs have been completed.
Check that all items included in the purchase of the home (review contract) are present.
For new construction, write down what needs to be completed or fixed, have builder sign. Include the date when these items will be completed.
You will have to have your closing cost “monies” deposited in escrow before you can close. Don’t bring in a personal check to pay. Money should be in the form of a certified check or a money wire transfer. Check with your escrow officer.
Before You Sell
Dress For Success
Before you put your house on the market, it’s best to put a shine to it.
The way you present your property to prospective buyers can make all the difference.
Without investing in expensive and time-consuming renovation and redecoration, it’s still possible to show your home to its very best advantage.
That first impression when prospective buyers drive up is very important.
If they don’t find the outside appealing, they won’t be interested in seeing what’s inside.
Mowed lawns, trimmed shrubbery and clean windows are a start.
Planting a few flowers or plants can do a lot to a front yard.
Fertilize and water the lawn and plants thoroughly for 2-3 weeks before putting the house on the market.
Clean up oil spots on the driveway. Make sure the garage door opens easily.
Swimming pools should be clean along with the pump and filters.
Clean up and throw away any junk or items laying around the yard.
Now is a good time to have a yard sale, get rid of those items that you don’t plan to take with you. Do this before you put your house on the market to greatly reduce the “detrimental clutter look”.
Start packing away little things that you don’t use every day.
Recycle magazines, newspapers, bottles, cans and so on.
Pet droppings can easily turn the buyer back to the front door.
If your house could use a paint job and you don’t have the time or money, sometimes hosing it off (from the bottom up) and repainting the trim will update the entire facade.
At least paint the side facing the street.
A clean front porch with a fresh-looking front door that opens smoothly is a must.
Any broken windows should be fixed now as they will most likely be before closing.
A few gallons of stain or paint can add real impact to a fence.
Inside, everything should be spotless.
Spending $100 to have someone do heavy “spring cleaning” if needed can bring a return many times over in the sales price and time on the market.
A fresh coat of light-colored paint on the walls is always recommended.
Painting only the trim and the doors will add a lot.
Check to see that all doors open and close freely. Oil any squeaky doors.
Replace any burned-out light bulbs. Brighter lights enhance many rooms.
Steam clean the carpets if new carpeting is not possible and to help eliminate any pet odors. Wash and wax linoleum floors. Repair or replace damaged or missing tiles.
Bathrooms should sparkle. Remove soap scum and mildew. Replace old-looking toilet seats. Kitchens should be clean and bright. Clean oven and stovetop. Exhaust fans should be free of grease and dust. Clear all unnecessary objects from the countertops.
Keep curtains and blinds open and interior lights on for a bright warm cozy feeling.
Store stuff and clutter under beds, not in closets.
Buyers react most strongly to kitchens, bathrooms and closets, so it pays to concentrate your efforts here.
Sometimes just switching door handles, knobs, and light switch plates is a dramatic improvement. Replacing new shower curtains and sink faucets can pay off.
Preview the competition’s open houses to see what you are up against in both pricing and condition. Potential buyers will be previewing these and more.
Try to look at your house “through the buyer’s eyes” as though you’ve never seen it before.
Lockbox is #1 Importance. “If we don’t have it, agents won’t show it.
Building A House
Buying Land & Building a Home
Following is general information and may vary from area to area. Check your local government for specific information.
Before you spend much time looking for land to buy, first do a little research to find out what costs and steps have to be taken before the actual construction. You may decide it is worth more to buy an existing home and make personal modifications.
Many first-time home builders think you just buy a lot and get some building permits and start building. Not so, there are a number of steps and issues one has to consider before applying for building permits.
When buying land, you need to check the zoning to see if a home can be built on it.
If it is zoned for residential, one must consider if it can be hooked up to sewer and water or is capable of supporting a septic system and well.
Septic systems generally cost $5,000-$10,000.
Wells can cost $15,000-$40,000, depending on the depth, location and the need for a secondary pressure tank.
Building in an unincorporated area usually requires a secondary pressure tank for the required interior fire sprinklers. Then there is the cost of bringing in other utilities such as electricity, propane tanks and phone lines.
Certain areas in the county require a “Perq Test” to determine if the site is suitable for the required septic system. This involves digging a hole about 10 feet deep and waiting a few days to determine if the ground water rises to the point where a septic system would contaminate it.
This test can only be done during the rainy season which generally ends in April.
Grading a lot can be a major cost of building a home. Many lots are priced seemingly low because of the high cost of grading and site preparation in order to build.
Obtaining a loan on land is not as easy as getting a loan for buying a house.
Buying raw land, lenders typically require 50% down usually with a shorter term and a higher rate of interest.
Once these steps are taken the next stop is the local planning department.
The following information was derived from materials provided by the cities of Morgan Hill and Gilroy and should be considered as only a guideline. Contact the City for the most up to date information.
Follows are some of the steps necessary to complete the process of building a home.
Advanced Review Group
This group, consisting of a Planner, an Engineer, a Plan Review Technician and the Fire Marshal, meets with the project owner and his/her staff at their request, prior to the submission of any application, to discuss the process for that particular project.
This optional meeting is designed to result in both the owner and the City having an understanding about the nature and scope of the project, the steps required in the process, an approximate time frame in which the project can be completed and an approximation of the fees which will be charged.
Land Use Applications
Land use applications are processes such as General Plan Amendments, Zoning Changes, inclusion in the Urban Service Area, Residential Development Ordinance applications, Tentative Map applications, Conditional Use permits, and Architectural and Site Reviews. One or more of these applications may be necessary on some developments.
Certain projects, because of their size or potential impact, may require an environmental review. This determination is based on rules of the California Environmental Quality act.
Development Review Group
The Development Review Group meets every week to discuss all applications received in the past week. This group consists of members of each Division within the City organization which has responsibility for any part of the development process.
The group reviews Architectural and Site Review applications. It will also review preliminary plans in order to help the applicant identify any problem areas prior to a full submission of an application. In many cases, this results in significant time savings for both the applicant and the City, allowing us to reduce your costs as well as the fees we must charge to recover our costs.
Additional or new allocations for sewer capacity are granted by the Engineering Division in accordance with policies set by the City Council.
Connections to water, sewer and storm drainage systems are handled by the Engineering Division. Engineering also reviews all infrastructure plans associated with new development and inspects the work.
Parcel maps are required in order to split lots and for subdivisions.
Building Permits and Inspection
Building permits are generally required for any building or construction involving any plumbing, electrical, mechanical, or structural alterations.
The Uniform Building Code states that a permit is required for all new construction, demolition, remodeling, improving, removing, repairs, or moving of all buildings or structures.
Regardless of the type of occupancy, a permit is required for additions, swimming pools, hot tubs, spas, decks over 30″ above grade, carports, sheds over 120 sq. ft. of roof area, skylights, covered patios and walkways, retaining walls, bathroom and kitchen remodeling, termite repairs, reroofing, solar panels and most interior and exterior remodeling work. Permits are also required for plumbing, electrical, and heating and cooling work.
When work is done without a permit, the permit fees will be doubled, the completed work may have to be dismantled or uncovered to provide access for inspection.
Who May Apply for a Permit?
Property owners or licensed contractors may apply for a building permit.
The person signing for the permit must declare they have no employees, or they must show proof of a valid Workers’ Compensation Insurance policy before a permit can be issued.
General Permit Requirements
For new construction, additions and most remodeling, complete plans are required.
All plans must include the name and address of the architect, engineer, or other person preparing the plan.
Energy calculations are required and must be incorporated into the plans.
Generally 3 or 4 sets of plans are required to be submitted.
Information Required on Drawings
A plot plan must be included in plans for any work which alters the use, exterior footprint, exterior of an existing structure, or for any new buildings.
Plot plans must show lot dimensions, front, rear and side setback distances to all property lines and existing buildings.
Indicate all easements and underground utility lines.
Show locations and sizes of proposed and existing water, sewer, gas and electric meter.
Floor plans must show dimensions and the location of all walls, plumbing fixtures, doors, windows, appliances, kitchen counter, furnace and water heater.
All electrical fixtures and locations must be indicated.
Framing plans must indicate the sizes of floor joists and girders, ceiling joists and roof rafters. If you are using main beams, trusses or any unconventional framing, calculations must be submitted.
Four exterior elevations are required which show windows, doors, skylights and architectural finish features. Heights of buildings must be indicated to show compliance with zoning regulations.
If you are constructing a new building or addition on a hillside, engineered footings are required, with soils and geology reports to substantiate all design assumptions. Calculations shall be submitted in two copies with the designer’s wet signature and stamp. Structures in the residential hillside zone must have non-combustible roofing and be equipped with fire sprinklers.
How Much Will it Cost?
Building permit fees are based on a proportion of the total construction cost, including all labor and material involved in the proposed work.
A plan check fee is assessed at a percentage of the building permit fee.
Plumbing, electrical and mechanical permit fees are based on the actual work done, such as how many receptacles, sinks, etc.
Where applicable, all site development fees, parks development fees, public safety fees and school impact fees, mitigation fees and water meter hook-up fees must be paid prior to permit issuance.
Tax Changes and Effects
The new capital gains law allows homeowners to avoid paying taxes on the first $500,000 of profit if they are married or on the first $250,000 if they are single.
You must have lived in the home as your primary residence for two of the last five years.
You are allowed to use the provision as often as you like, as long as it fits in that two-year period. Any gains above the limit will be taxed at the new 20% capital gains rate – down from the current 28 %.
The old law provided a $125,000 “one-time” tax-free exclusion on profits for home sellers 55 or older. This no longer is used, but those who have used it will be allowed to use the new provisions without penalty.
Under the old law, you could roll over gains if you bought a more expensive house.
If you sold a more expensive one and purchased a less expensive one you were liable for gains tax. Under the new law, this provision is no longer in effect.
If you bought and sold a home within 1 year, any capital gains would be taxed as regular income.
If you bought and sold between 1 and 2 years, gains would be taxed at the long-term capital gains rate.
Filing an extension may be a consideration, talk with a CPA for advice.
Needing to sell and move for specific reasons may have cause for exclusion of gains tax prior to two-year ownership.
Always save receipts for home improvements in a “house file”.
If you don’t qualify for the 2-year ownership rule, the cost of improvements can be used to offset capital gains tax you may have after the sale of your property.
People Benefited Now!
– Wanting to downsize, children have all moved out.
– Retirement and move out of the area to less expensive area.
– Job relocation from area with high property values to lower values.
People with rental property could sell their current home, move into their rental for two years and sell it under the $500,000/$250,000 provision with the same benefits.
Change in Property Values?
It is unknown how many people have been waiting to sell their property until this bill was passed. One possible scenario: Many homes are suddenly put on the market.
The Immediate Impact!
Should not immediately affect property values as there currently appears to be more buyers than sellers. The immediate effect would be properties with more “days on the market”. This would hurt sellers needing to move soon or those sellers who listed the house over market value.
The Next Impact!
When more and more houses are put on the market with fewer buyers this market peak will end. Property values could go back down again like 7 years ago, to start a new cycle.
Timing for those sellers sitting on the fence could mean more money made.
Contact your accountant or tax attorney for advice.
The final package allows penalty-free early withdrawals of up to $10,000 from an IRA to help with the down payment on a first-time home purchase.
The IRA can be the home purchaser’s own account or can be a parent’s or grandparent’s.
If you are not sure what tax consequence you face when selling real estate, consult with a CPA or tax attorney and not a real estate agent.
Choosing A House
Before you actively look at homes to buy, it’s necessary to know how much you can qualify for. Use mortgage calculators to determine how much you can buy with your down payment and closing cost money and what your monthly payments will be.
Know Your Credit Worthiness
Look at your credit report before you go to a lender. It is not uncommon to find problems with reports, especially if you have a common last name.
After you see your credit report and any problems are cleared up, get pre-approved with a lender. Take the steps necessary to get a letter from the lender stating you are “pre-approved” for a loan in a specific price range. It’s important to have this letter before you make a contract offer to buy real estate. Once your pre-approved, you know what price range of homes you should be looking at.
What Kind of House is Right?
Determine the specifics you want or need in a home.
– What are your day-to-day and future needs?
– Do you enjoy swinging a hammer?
– Older houses have great charm but may need updating.
– New homes offer the latest energy efficiency and design features.
– Larger lots can give room for additions and swimming pools.
– A fixer-upper can dramatically increase in worth.
– A PUD may have private recreational facilities such as a pool and play parks.
– A condo or townhouse will relieve you of yard work and exterior maintenance.
Sit down with your real estate agent and make up a wants and needs list. Knowing your price range, your agent can determine in what neighborhoods or towns to start looking. You may find that you are limited to where you look based on your situation.
There is no sense in wasting your or your agent’s time in areas out of your price range.
Wants and Needs
– Price range
– Building style/design
– New construction
– Minimum # bedrooms
– Family room
– Hardwood floors
– Swimming pool / Spa
– In-law quarters
– Central air conditioning
– Parking facilities
– Yard size
– School district
– Work locations
– Special zoning or location
With a list of houses that you can afford to buy, drive by them and check out the surrounding neighborhood. Next make an appointment with your real estate agent to view the interior of the ones you are interested in.
After you have narrowed your selection to a few houses it is important to visit them at different times of the day. Visit them during the morning commute time. If you visit only during the middle of the day, you might not notice if the street in front of the home is used as a minor thoroughfare or a shortcut. This is also a good time to find out how you emerge from you residential area into traffic on a thoroughfare or how long it takes for freeway access. Go back after dark and walk around the block. You might notice that headlights from approaching traffic shine into the home or hear sounds from a nearby night club or park that you were not aware of.
After previewing a number of homes, you will want to preview some a second time. This is the time to make measurements, ask questions and make a closer self-inspection.
When you want to make an offer, ask your agent for sales comps to arrive at an offering price.
A “seller’s market” or “buyer’s market” can have a big effect on how much to offer. There is no sense in making a low offer on a well-priced home in a seller’s market.
A properly written contract will allow a buyer a number of outs if certain items are not met or approved. Get a copy of a typical real estate contract prior to making an offer and have your agent go over it with you.
To find out what prices homes are listed for in areas you are considering, go to the different Internet listing sites and make searches for properties.
After you are pre-approved for a loan and are ready to buy in the South County area, get signed up with my Listing Alert System. Once signed up, all new MLS listings (in the price range and your preferences) will automatically be emailed to you as soon as they come on the market.
Most lenders require at least 10% of the purchase price, though new programs are available for 3%-5% down. 100% financing can be found, but you credit must be excellent and PMI insurance will be required.
Loan Origination Fee
A lender’s fee for establishing a new loan. Government regulations allow only 1% origination fee on FHA or VA loans. Conventional loan fees can vary from -1 to 3+ points, plus other costs. A point is 1% of the loan.
Fee paid to obtain an estimate of market value upon which the lender will base the loan amount. The cost is about $300-$500. Non refundable.
An evaluation of the buyer’s credit habits made by a credit bureau for the lender. The cost is $50-$60. Non refundable.
Tax Service Fee
A charge of approximately $75 is made by a tax service company to verify to the lender that the taxes have actually been paid when due or are due to be paid by borrower or mortgage company if impounding.
Fee of approximately $250 up to 1% of the loan balance is charged by the existing lender for the privilege of assuming the existing loan.
Pest Inspection Fee
Fees of $75 – $175 is charged by termite companies for inspecting property for damage done by wood destroying organisms and dryrot.
It is customary for the seller to pay for Section 1 and the buyer for Section 2 work.
Other Inspection Fees
Other inspections the buyer may choose to have done are: property inspections that usually cover foundation, electrical, plumbing and overall construction at a cost of $300-$400. Roof inspections cost $75-$125. Geological reports cover the subject’s site in relation to fault and slide zones, costing about $100. Septic $200-$400. Radon $50-$100. Asbestos $75-$125.
City Transfer Tax
A municipal tax imposed within the corporate limits of some cities.
The cost is $3.30 per $1,000 of selling price, usually negotiable between buyer and seller, but custom varies between countries.
The VA does not allow the veteran buyer to pay any portion of this cost.
Miscellaneous Costs & Fees
An estimate of $150 should be adequate to cover minor items as a notary, recording documents, endorsements, etc. as well as allowing for variations from these other estimates.
Hazard Insurance Reserve
Two months’ premium is collected for the impound account if required. The buyer will need to either provide or pay for coverage for the 1st year.
Interest must be paid from COE (close of escrow) to 30 days prior to the first regular mortgage payment. An estimate of one months interest should suffice.
Mortgage Insurance is required on all conventional loans greater than 80%. The cost may range from 1/2% to 1% per year and 14 months premium is collected in advance. This is coverage for the lender in case of default.
If the new loan is going to have an impound account, the lender will require from 2-10 months’ taxes to be deposited, depending on the time of year. Note: if taxes are prorated, buyer’s total charge for taxes should equal about six months’ taxes.
These fees range from $750-$2500, depending on the sales price. In some counties it’s customarily paid by the seller, in other counties the buyer pays, while in others it may be customarily split. Remember though, everything is negotiable.
The above fees are typical costs when buying real estate in California counties.
Most of the fees are considered buyers’ non-recurring closing costs.
Some of the fees are fixed while others are negotiable.
Your real estate agent can negotiate with the sellers to pay some or most of these costs, saving you thousands of dollars in closing costs.
Ask your real estate agent and loan agent to provide estimated closing costs of buying a home before looking at homes.
First Time Buyer
Condominiums are a good way to get into the housing market if you can’t afford to buy a house or prefer this type of lifestyle. Condos are also great if you don’t want to spend a lot of time doing yard work or maintenance.
One important thing to remember about a condominium is that you don’t actually own the unit you live in nor the lot.
You own the air space inside the walls, ceiling and floor of the unit.
With a townhouse you own the unit along with the lot.
Owning a condo, you are restricted from adding a room, painting the exterior or changing the landscaping.
When you buy a condo you are also joining a homeowners’ association which is responsible for the maintenance of the units, insurance, garbage and outdoors areas. The monthly HOA fees may seem high at first, but owning a home will have similar costs over a same period of time.
What to Consider when Buying a Condominium
Ask owners in the complex what they like and dislike about both the unit and the complex.
How good is the soundproofing? End units and upper units generally sell for more when sound comes into play.
How is its location in the complex? Next to an access street, parking facility, pool?
Look for units that are not adversely affected by these.
Stay away from predominantly rental condo complexes, those having more occupants than are renters. They are often poorly maintained as absentee owners usually vote against improvements and increases in maintenance fees.
Many lenders will not make loans if the percentage of renters is high compared with owner-occupants.
Compare monthly association fees with other similar condo complexes and what amenities are included.
Find out if any increases in fees or special assessments are planned.
Is the condo homeowners’ association in good financial condition. Before making a purchase offer, obtain the latest financial statement from the homeowners’ association.
Are there any lawsuits between the homeowner association and the builder?
Who manages the complex and how well are the common areas maintained.
Check to see if there are any unusual bylaws, rules or CC&Rs. A good complex generally is a result of restrictions of pets and rentals. Read all papers carefully.
Buying in a New Complex.
Find out how many units are sold and closed. Don’t be one of the first buyers.
It’s better to have 60% of the condos sold before you close your purchase.
If the units don’t sell or the developer goes bankrupt, you may end up owning much less.
Make sure a warranty is provided for one year on everything in the unit.
It is important to know exactly what your developer will warrant when buying in a new complex.
How do Condos Compare to Single-Family Homes?
Based on appreciation, condominiums in some areas have been as profitable an investment as single-family homes in the last five years. In some markets, condos appreciated even more.
Problems with Condominium Associations, are Condos a Bad Investment?
Despite problems in many associations, condominiums have done a good job of holding their value. Real estate experts say that the reason there are more stories about conflicts in associations is the proliferation of homeowners’ associations.
Condominium associations involved in lengthy and expensive litigation may find that such disputes will hurt resales because some lenders are reluctant to make home loans on units in their projects. However, experts argue that many disputes today are resolved more readily without initiating legal action. In addition, the condominium community has worked hard in the last few years to overcome image problems that were brought on by disputes and lawsuits among condo owners and developers.
Associations today are becoming more sophisticated about property management and are taking steps to prevent legal problems and disputes.
Buying a condominium is still an excellent way to start homeownership.
Buying a home, you are entering into a legally binding contract that must be clearly understood both in terms of rights and obligations.
Today’s real estate contracts are quite lengthy.
Agents are trained to understand and explain the contract along with the reports that are involved in a real estate transaction. Have your agent give you a sample contract to read over prior to you making your first offer. Get explanations to areas you don’t understand. This will take a lot of pressure off you during the negotiation period.
When it comes to contracts, put everything in writing and fill in all the blanks. Wording should be specific and carefully chosen.
When it comes to who pays for what or if it ever comes to litigation, it’s what is in writing that counts.
Presenting the Offer
When you find the right home, move on it quickly. Have your agent run “comps” on similar sales in the neighborhood. Use this information to base your initial offer. Before your agent writes up the offer, he should attempt to find the seller’s motivation. Where are they moving? Why are they selling? How long has the home been on the market? Do they have an offer on another house?
The agent will want to consider other aspects before writing up an intelligent offer.
Is the property still for sale or are there offers pending? Is it a probate or foreclosure sale? How much do the sellers owe, are they willing to carry back a loan? Who pays for certain transfer fees may be decided by local custom.
Different scenarios will dictate how a contract will be written up and presented.
Be Realistic with Your Offer
Negotiation time can be very emotional.
If you give a lowball offer, the seller may reject it and any other offers.
Your agent will present your offer with all the reasoning behind it.
Your agent will be more effective if you are not present at the negotiating table.
Let them do their job. They know more about the details of the offer and can present your offer in a positive light.
When an agent presents an offer on your behalf, often there is another agent involved, the listing agent. If your offer is reasonable, expect 1 or 2 counteroffers.
You will be signing many papers during this time. Contract, counteroffers, disclosures, addendums, reports and so on. Make sure to get a copy of everything you sign. You should have copies with the signatures of all those involved in the transactions.
After the seller has accepted your offer, the process of escrow and closing begins. Inspections need to be ordered and scheduled in a timely manner.
The loan process will begin and generate an equal amount of paperwork.
This can be a very emotional and confusing time because of what is involved.
The agent will follow the transaction through the closing and will walk you through the steps and keep you informed.
Be patient, realistic and educated about the process.
The typical real estate transaction takes 30-45 days to close after a contract is ratified.
Credit Reports & FICA Scores
Good FICO Scores = Best Loan Rates
FICO scores (credit score) are what the vast majority of American mortgage lenders use to evaluate home loan applicants’ creditworthiness.
The scores are based on a number of factors that analyze the electronic credit files maintained on virtually all adults in the U.S.
The scores range from the 300s to around 850, with higher scores indicating lower risk. Many lenders reserve their most favorable quotes of rates and fees for applicants in the upper FICO score ranges, 700 and above.
Mortgage applicants in the low 600s and below get progressively higher rate quotes and are charged higher loan fees.
Your FICO score only looks at information in your credit report.
However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.
Your Score Takes into Account:
Payment information on many types of accounts, including credit cards, retail accounts, car and mortgage loans.
Public record and collection items such as bankruptcies, foreclosures, suits, wage attachments, liens and judgments.
Details on late or missed payments (“delinquencies”) specifically, how late they were, how much was owed, how recently they occurred and how many there are.
How many accounts show no late payments.
Length of Credit History
How Scores are Established
Approximately 15% of your score is based on your credit history. Generally, a longer credit history will increase your score. The score considers both the age of your oldest account and an average age of all your accounts.
10% of your score is based on new credit or if you are taking on new debt. Opening a couple of new credit lines in a short period will hurt this score. If you are planning on buying real estate in the near future, put off buying a car until after it closes. A new car loan can have a big impact on what price of house you can qualify for.
10% of your score is based on the types of credit in use. The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
30% of your score is based on amounts owed on all accounts. Even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.
The score considers the amount you owe on specific types of accounts, such as credit cards and installment loans.
Small balances without missing a payment show that you have managed credit responsibly, and maybe slightly better than no balance at all. Closing unused credit accounts that show zero balances and that are in good standing will not generally raise your score.
A large number of accounts can indicate a higher risk of over-extension.
35% is based on payment history. The first thing any lender would want to know is whether you have paid past credit accounts on time. This is also one of the most important factors though late payments are not an automatic “score-killer.” An overall good credit picture can outweigh one or two instances of, say, late credit card payments.
Understanding credit scoring can help you better manage your credit.
Mandatory Disclosures Required
With ever-increasing mandatory disclosure obligations being placed on sellers of real estate, it can be difficult to keep up with new requirements. Real estate agents and sellers are being held to ever more stringent and higher standards of care. The number one claim on Errors & Omissions Insurance is “failure to disclose” some item that a Buyer felt was material.
Although there is no way to completely prevent lawsuits, there are some general guidelines to help protect against non-disclosure liability.
Make all disclosures in writing and obtain acknowledgment signatures.
If there is any doubt, don’t wait for the Buyer to ask – disclose, disclose, disclose.
What is Escrow?
Escrow is the depositing of funds and documents by the parties to a transaction with an impartial or neutral third party.
It takes orders from sellers, buyers, lenders, inspectors, and others setting out the terms and conditions under which further delivery is to be made.
Many escrows are done through title companies that provide reports and title insurance.
The Purpose of Escrow
Escrow enables the parties in a real estate transaction to reduce the risk.
The Escrow Holder Acts as:
– A custodian for funds and documents.
– A clearinghouse for payments of all demands.
– An agency to perform the clerical details for the settlement of accounts between parties.
What is a Preliminary Report?
The preliminary report shows the ownership of a specific parcel of land and lists title defects, liens and encumbrances.
There may also be recorded restrictions that have been placed in a prior deed or contained in what are termed CC&Rs – covenants, conditions and restrictions.
A report is ordered after escrow is opened and provides the buyer the opportunity to seek the removal of items which are objectionable, prior to purchase.
What is a Policy of Title Insurance?
Title insurance is real estate ownership insurance or an insured statement of the condition of “title” of a particular piece of property.
It insures your rights and interests in order to protect you against claims.
Title policies are issued to both the buyer and the lender.
All Lenders Require Title Insurance.
The two most common forms of title insurance are the CLTA standard coverage policy and the ALTA loan extended coverage policy.
Both the buyers and sellers are charged fees.
Who pays for what varies in different areas or counties.
Even though different areas have typical standards, everything is negotiable.
Escrow Officer’s Responsibilities
– Reviews preliminary report
– Provides copies of preliminary report to all parties
– Receives and prepares seller’s & buyer’s escrow instructions
– Receives buyer’s funds for escrow
– Arranges hazard insurance with buyer
– Complies with lender’s instructions
– Arranges new loan funding with lender
– Prepares documents and special instructions
– Records documents with county recorder
– Disburses monies and documents to the appropriate parties
– Prepares final closing statements for buyers and sellers
– Issues title insurance policy.
Why a Real Estate Appraisal?
There are many reasons why you need a real estate appraisal.
Reduce property taxes, probate, estate planning, divorce settlements are some.
The most common one is to obtain a mortgage.
Most lenders are required by federal and state laws and current banking regulations to obtain an appraisal for most loans secured by real estate.
As of Jan. 1, 1993, all appraisals made for mortgage loans from federally insured lenders and other federally related transactions must be made by a licensed or certified appraiser.
What is an Appraisal?
An appraisal is an objective supported opinion of the value of an adequately described piece of property made by an appraiser who has sufficient knowledge, training and experience to accurately estimate its value.
In this detailed and time-consuming report, appraisers use comparable sales together with information about the property being appraised, its neighborhood and community along with the local and national economy, to support the appraised value.
Look Objectively not Subjectively.
The most important thing you can do when previewing is to look at the house as if empty: four walls, floors and a roof.
Don’t let the current owners’ furniture and decor influence you.
If you are buying a house with the owner carrying the paper (loan), it is well worth the cost to hire an appraiser to make sure you don’t pay more than it is worth.
For your protection many real estate agents will write in a purchase contract: this contract is contingent upon the property appraising for the sales price.
How is Value Established?
The value of a house is based upon recent sales of similar neighboring homes in the market as well as rentals and listing data.
Ideally, appraisers want to use sales of properties of the same size, age, room count, condition and with similar amenities and external influences. This rarely happens though, so adjustments have to be made, based on what people will pay extra for.
Examples: extra square footage, bedrooms, fireplace, upgrading, parking facilities, swimming pool, lot size, location and so on. To help get a better picture, this information is entered on a form, a value for differences is established and comparisons are made to the subject property.
A minimum of three verified closed sales with photos are required to establish a value.
Houses Appraise for More When:
– Well maintained inside and out.
– Located in a good school district.
– Additions are done with the proper building permits.
– Additions conform with and fit well into the existing house.
– Properties throughout the neighborhood are well maintained.
– Not over improved or the largest house on the block.
– Style of the house conforms with those in the neighborhood.
– Zoning changes are not expected or it is not mixed-use.
Remember: Location, location, location.
You can change everything about a house except its location.
What is a Poor Location?
– Located on a feeder street.
– Under an airport flight path.
– In or near a gang territory.
– Center of nightlife activities.
– In a rundown block or neighborhood.
– Next to a school or schoolyard playground.
– Next to apartments or commercial property.
– In close proximity to a freeway, expressway or railroad.
– Next to a gas station, near municipal garbage or toxic waste dump.
– Odors from factories, farms and processing plants are routinely noticed.
– The city is affected by the closing of a major employer.
Think about Selling – When You are Buying.
Location is a big factor in a home’s appraised value. This is most notably felt at the time you sell or refinance. What seems like a bargain when you buy might turn into a real headache when you try to sell.
Drive around the neighborhood and note any adverse conditions.
You may think you can live with something adverse for the price, but when it’s time to sell you might find buyers won’t.
Adding onto your house = Always obtain a building permit.
A 600 square foot addition built without a permit is given no value on an appraisal. When it is time to sell or refinance, the frustrations of the building permit process will be worth it.
Always save copies of the final permit sign-offs and keep them with your house papers.
Buying a House with an Addition?
Verify that it was built with a permit prior to closing the sale.
Don’t just accept the seller’s word. Get copies of the permits before the final sign-off.
Should you want to refinance or sell at a later date, and the appraiser cannot verify the addition being permitted, no value should be given.
The result: no new loan or worse . . . no sale.
A one-bedroom house or condominium doesn’t appreciate as well and is harder to sell.
Work with An Agent
An advantage of working with a real estate agent is that they can provide you with sales information of similar properties to better guide you on how much to offer.
Your agent can provide recent sales “comps” for similar homes in the neighborhood.
Finding the list prices is also important. Comparing the list prices with the sale prices tells you exactly what percentage of the list price sellers are getting.
What To Do First
Obtain a copy of your credit report and check for errors.
Do this prior to your lender ordering one. Mistakes are found.
Next gather all your financial data.
Lenders will want to see bank account statements, paycheck stubs, W-2 forms and tax returns for the last two years, investments and proof of any other sources of income.
Down Payment Sources
– Sell a car, boat or other property.
– Receive a tax-free gift from parents or relatives.
– Borrow against a pension plan or a life insurance policy.
– Equity share with parents or friends.
– Use your business as collateral.
If you can make only a small down payment or have credit problems, consider asking the seller to help you with the financing.
Example: Sellers can “carry back” a second mortgage to reduce the amount of the first mortgage you need.
By reducing the loan-to-value ratio of the first mortgage to 80% or less, buyers often avoid paying for private mortgage insurance when they use a seller-provided second mortgage.
Other Financing Options
If you can’t qualify for a conventional loan because of income, don’t give up. There are a number of special programs to get you into a home. Some cities have BMR (below market rate) housing programs that allow qualified buyers to purchase new homes substantially below market value.
Programs to Help Lower Income Families:
Community Homebuyer loan program
FHA’s 203(k) program (for fixer-upper)
Mortgage Credit Certificate program (MCC)
Enhance Fannie Neighbors mortgage program
Fannie Home style loan program (for fixer-upper)
Ask your loan agent for more information about these programs.
Comparing Programs (ask yourself):
How long will I live there?
What are the tax implications?
Can I expect earnings to increase or decrease?
Are interest rates likely to go up or down in the near future?
Questions a Borrower Should Ask
Are there any “upfront” fees?
What is the annual percentage rate?
What and how much are the points?
Is there a prepayment penalty?
Is there a balloon payment?
Is the loan assumable by someone later?
How much money must I have at closing?
What is the interest rate and term of the loan?
What is the monthly payment for principal and interest?
What happens if interest rates change during the loan process?
Do not hesitate to ask questions.
Take the time to carefully examine the programs being offered.
Get a written cost estimate upfront.
Interest rates are negotiable.
Costs for fees may be negotiable.
Save money by shopping around for your mortgage.
A larger down payment isn’t necessarily the best way to go.
It may not be to your advantage to pay off your mortgage early.
Larger monthly mortgage payments mean a larger tax deduction.
Interest rates on mortgages may be high, but the interest is tax-deductible.
A short-term mortgage will build more equity for you in a shorter period of time.
Mortgage insurance may be required if the down payment is less than 20%.
A second mortgage or equity line on top of a low rate first mortgage may be cheaper than refinancing a new first mortgage.
What is the Best Loan?
You can save thousands of dollars or increase your home purchasing power by selecting the right loan.
New mortgage programs are constantly entering the marketplace in response to consumer needs. Take the time to understand and compare programs available to you.
With many tax deductions being eliminated, it’s comforting to know that mortgage interest is still deductible. Besides the interest, you also can deduct any points paid to secure a loan on your first or second home.
Property taxes on your home are fully deductible. These can add up to sizable savings on your income tax bill.
You may deduct a portion of your house expenses if you have a qualifying home office.
Tips to Expedite the Loan Process
Pay off credit cards before the lender orders a credit report.
Don’t buy a car or take out a loan prior to applying for a loan.
Don’t charge expensive items on charge cards before getting a credit report.
Have verification of the down payment and an explanation of the source of money.
Getting money from relatives? A Gift letter from them will be needed.
Completely fill out the loan application, providing addresses with zip codes and all account numbers.
All of us want a bargain.
There are no better bargains in real estate today than the purchase of distressed properties at substantially less than fair market value. The process is not complex, but success in this field requires a large amount of time to research and a more modest amount of money.
Five Ways to Acquire
In general, there are five basic ways to acquire foreclosures at discounted prices. All but one of them permit the buyer to pay for qualified assistance from other sources (such as a title and / or escrow company. Unfortunately, the most popular technique (buying properties at the trustee’s sales) allows no such luxury. The purchasing process at the trustee’s sale requires each buyer to make his own thorough investigation of both title and debt on the chosen property within a limited time frame.
The first and simplest way to buy properties under the fair market value arises when the delinquent (not defaulted) owner is uncovered. The delinquent buyer will not have made recent payments of principal, interest, taxes or insurance and/or may have reduced the value of the property through benign negligence or lack of funds. When the delinquent owner realizes that he will be unable to meet the commitments on promissory notes and trust deeds for an extended period, he may choose to sell his property even at a discounted price rather than proceed through the foreclosure process.
The wise buyer will point out to the delinquent (and later defaulted) owner how he will be harmed by proceeding through the brief foreclosure process to the trustee’s sale. At that point, the owner will lose his property, lose his equity, reduce his credit standing as a result of the recorded foreclosure and may have taxable income due the IRS for the amount of the debt reduction (elimination of the trust deed debt) resulting from the trustee’s sale. Selling to an interested buyer at a discounted price may well be the most convenient solution for the troubled, delinquent owner.
The property owner becomes a defaulted owner when the trustee for the beneficiary records a Notice of Default. During the following three month plus three week periods, a Notice of Trustee’s Sale also will be recorded and published in a local adjudicated newspaper once a week for three weeks just prior to the trustee’s sale. Live-in buyers of the property of the defaulted owner may negotiate any reasonable purchase price and terms for the property with the defaulted owner. Investors who seek to purchase the primary residence of a defaulted owner of one to four units and who are not related to that owner must work with the equity seller under the restrictions of two California Civil Codes which can make such purchases more difficult. These restrictions require the use of a special contract with a Notice of Cancellation, permit the equity seller to pursue the equity purchaser for unconscionable advantage for two years after the sale, and eliminate the use of outside assistance in the pursuit of a foreclosure property. Investors who unwittingly or intentionally become foreclosure consultants to equity sellers may also place themselves in jeopardy under certain conditions.
Most purchasers of foreclosures prefer to acquire their properties at the trustee’s sale. At this time, it is possible to make property purchases without being in contact with the defaulted owner or foreclosing lender. Money talks. Anyone with money may make a purchase regardless of credit, race, religion, etc. The verbal auction permits the highest bidder to acquire a property by paying off only the remaining balance on the foreclosing loan regardless of the fair market value of the property. Debt recorded after the date of recording of the foreclosing loan is eliminated. Problems of unanticipated repair, eviction, payoff of superior loan(s), possible IRS redemption and inadequate research can present formidable obstacles to the inexperienced buyer.
When a trustee’s sale is held with no bidder present, the property is said to be “sold” to the foreclosing lender. The REO lender usually will sell the property rather than retain the property as part of the lender’s nonperforming assets. Finding that lender who will well the property newly acquired at the trustee’s sale at a substantial discount is not easy although it is possible through a careful selection of lender sources of such properties. Individuals (not lending institutions) normally present better opportunities to purchase at a discount.
Friendly Junior Note
The fifth way to buy foreclosures is just a bit more complex but is an attractive way to acquire properties with less competition than purchasing at the trustee’s sale. If the holder of the junior loan to the foreclosing loan agrees to sell his promissory note and trust deed at a substantial discount, the purchaser of the junior loan may cure the underlying senior loans and then foreclose himself on the newly acquired junior loan. The sale of the property through the junior loan can bring immediate return on the face value of the junior loan of the acquisition of the property with attractive equity.
Frequently Asked Questions - Buying
How Much House Can You Afford?
There are several ways to gauge how much you can afford to spend on a house.
But, before you go house-hunting, get pre-qualified for a mortgage so you’ll know in what price range you can shop.
It is not unusual for first-time buyers to be somewhat baffled about how to estimate what mortgage payment they will be able to handle each month, plus how much money they’ll need for a down payment and closing costs.
That’s why it is a good idea to get pre-qualified through a lender before you even start to look for a home. Pre-qualification lets a buyer know exactly how much a lender is willing to loan them. With pre-qualification in hand, the buyer can save a lot of time and frustration.
Pre-qualification does not obligate buyers to take a loan from the lender, nor should it involve any fees (until later, when they actually apply for the loan).
At the same time, you must understand that pre-qualification is not pre-approval for a loan either which is a much more involved formalized process that results in an actual letter of credit from a lending institution for a specific loan. Depending on your unique circumstances, you may wish to consider pre-approval as an option, but it is not necessary-consult with your real estate professional to decide what is right for you.
The less formal process of pre-qualifying on the other hand is a tremendous tool for buyers to have when making an offer. Usually, pre-qualified buyers have an edge when making a purchase offer because the seller knows that the buyer is pre-qualified, and that there is at least one lender ready to make it happen.
In addition, it allows you the flexibility to choose the mortgage that is best for you at the time of actual purchase-which is sometimes months down the road. That can be important given the volatility of interest rates.
When a lender pre-qualifies, they are more concerned about the buyer’s paying ability than the price of the property.
For this reason, lenders are interested in more than just a buyer’s income. They also want to know how much existing debt a buyer has, what their on-going financial obligations happen to be, and what the buyer’s monthly budget looks like.
Lenders use an established debt-to-income ratio, usually between .28 to 1 and .38 to 1, to calculate the amount of the loan they are willing to give to a buyer. For instance, a lender who uses a .3 to 1 debt-to-income ratio has determined that payments toward debt reduction-including existing debt plus new debt associated with buying a home-cannot be more than 30% of they buyer’s gross monthly income.
An important factor that may influence a lender to authorize a loan with a higher debt-to-income ratio – (where debt payments take a higher percentage of a buyer’s income) – is a larger down payment. Buyers who put a larger percentage of the purchase price down (5%, 10%, 15%, 20%, etc.) are considered better “risks,” because the theory is that the more a person has actually invested in the purchase, the less likely they are to default on the loan.
Buyers usually discover that the pre-qualification process will produce a home purchase price that is roughly 2 1/2 to 3 times their gross annual income. The 2 1/2 -to-3 guideline is only a general rule of thumb, however, and it doesn’t take a buyer’s full financial situation into consideration. Since the lender’s calculations will also consider a buyer’s actual debts and ongoing expenses, the loan pre-qualification amount may be higher or lower.
Regardless of the price bracket a buyer targets, they should keep pre-qualification in mind.
How much should you budget to own your own home?
Aside from the down payment, the three largest expenditures involved with the purchase of a home are usually your monthly mortgage payment, insurance and taxes. Obviously, the amount of your mortgage payment depends upon your down payment, rate of interest and the price of the property.
Take, for example, a home that has a $200,000 mortgage. A 7% fixed mortgage for 30 years, will run approximately $1330 per month. What about taxes? The rate will often times vary from city-to-city, but generally, you might expect your yearly tax bill to total around 1.25% of the purchase price. That means, for a home with a market value of $250,000, yearly taxes might run around $3125. A local real estate agent can help prospective homeowners refine these figures.
In addition, it is important to keep in mind that there are many additional expenses incurred with homeownership, some of the most obvious are utilities and trash collection. Smart homeowners should also budget for one other item, maintenance and upkeep of the home. If possible, a small amount should be set aside each month to pay for those “rainy day” repairs such as painting, plumbing (hot water heaters, garbage disposals), adding storm windows (to improve energy usage), insulation (in attics), etc.
But homeownership is not just a one-way street, that is, aside from spending money on repairs and maintenance, homeowners can profit from their property. The most significant benefit is the tax deduction. It is no secret that among the last real income tax deductions available to consumers today are the interest paid on the home loan, and the property taxes. This can amount to thousands of dollars in deductions each year.
And, of course, the primary benefit of homeownership is appreciation-equity that builds every month. A home, aside from being a place that provides shelter, can be a profitable investment, and the rising value of the property oftentimes provides another “savings” account.
So, when it comes to buying a new home, remember one thing … the purchase of a property requires budgeting and planning.
How do you go about finding a mortgage?
The commotion of house hunting is finally over. You found just the right house, and your offer has been accepted. It was a great buy. Now, just one more hurdle-getting a loan-and you’re home free.
Often, buyers are so eager to get this “final detail” behind them, they rush through this portion of the transaction, and end up with less-than-ideal terms. Borrowers, however, have something lenders want-their business. This positions them to negotiate the best possible price (cost of loan), terms and service.
Let’s look at price, or the cost of the loan. The first thing to do is find out what the current rates are, information readily available on the internet, in your newspaper or from your real estate agent. When comparing rates, figure the annual percentage rate (APR), which includes interest, extra fees and costs amortized over the life of the loan. Also determine the number of points, if any, that the lender will charge to make the loan. (A point is equal to one percent of the loan amount.)
Next, consider what loan options the lender offers. There are six or seven basic types of loans, which vary in their duration. Check how rates are calculated (fixed versus variable), and whether charges are fully amortized over the life of the loan, or whether you’ll have to pay points up front and/or balloon payments at the end.
Is there a prepayment penalty clause?
Which terms are best for you depends on such factors as what changes you expect in your income and what you predict will happen in loan rates in the years ahead.
For example, if you only plan to reside in the home for a year or two, starting with a lower Adjustable Rate Mortgage (ARM) might be the best choice. If you have no plans to move, and feel that inflation will rise rapidly, a fixed rate would obviously be better.
Finally, and perhaps most importantly, consider speed and service. Buyers shouldn’t have to wait days for approval and weeks for closing just because the lender is slow.
Remember, qualified buyers are great prospects for lenders – so give your business to the lender who demonstrates they not only want it, they deserve it.
How difficult is it to qualify for a mortgage if you have a past credit problem?
Credit problems can make it harder to qualify, but it’s quite possible for buyers with poor credit to obtain a home loan.
Anyone who has had a financial problem-whether it was a matter of late credit payment, delinquent taxes, or even a judgment that was filed-should expect this data to be a factor when applying for a mortgage.
How critical of a factor is this?
Minor lapses will probably have little or no effect. However, buyers with serious problems may still qualify for a loan, but they may have to pay a higher rate of interest or provide a larger down payment.
There are three steps that a person with past credit problems should take before applying for a loan.
First, request a credit profile from one of three major credit reporting agencies. To get copies of your credit report, start at: Credit Now – Credit Reports
Second, the buyer should optimize his or her credit profile by citing prompt payment of rent, utilities, and other bills not reported on the credit profiles.
Finally, the buyer should be prepared to provide comprehensive and candid explanations for any late payments to the loan officer. This is important because problems not reported by the buyer but discovered by the lender will reflect unfavorably.
Many lenders are understanding about one-time problems such as the loss of a job, a medical emergency, etc.
Buyers with patterns of delinquent payments might want to consider adding six months or a year of flawless credit to their track record before pursuing their home-buying plans.
So remember if you are thinking about purchasing a home, but are worried about your past financial record-don’t give up.
There are solutions, lenders and agents who are in business to help.
What are the five most common mistakes made by first-time buyers-and how can you avoid them?
A good home-buying decision is one that fits your lifestyle and your budget-a house you’ll be able to resell when the time is right. Sound simple? Not always.
Five common mistakes frequently made by first-time buyers.
1. Looking outside your price range. To avoid disappointment, contact a real estate agent who can help you pre-qualify before you start looking for a home. The agent can also provide valuable insight on taxes and other expenses associated with a home (utility bills, etc.)
2. Buying on impulse. Buyers, especially first-timers, may be impressed by the first two or three homes they view. Look at a good selection. List the positives and negatives. Narrow the prospects to three or four, and then return for a closer look. Evaluate more than just the property. Look at the surrounding area and community amenities. Is this what you and your family want and need?
3. Not planning ahead. Think seriously about any personal changes you are planning in the next five to seven years.
For instance, if you are planning on having children, consider how the home will meet both your current and future needs. If a double-income is necessary to qualify for financing-and make your payments-do your plans foresee an income sufficient to continue making payments?
4. Failure to focus on location. Don’t just focus on the house, examine the neighborhood. Is the area safe, well maintained, moderately quiet and close to work, stores, and schools?
Find out about zoning and what new construction is planned on any vacant land in the immediate neighborhood.
Will the property be easy to market when you are prepared to sell it?
5. Failure to understand the home buying process. Once you select a home, get involved. Find a real estate agent willing to spend time with you, and don’t hesitate to ask questions. Have them explain the negotiation, financing and escrow processes and other elements involved in the transaction.
Home-buying involves knowing the price, and what is inside and around the property. Consider all your options carefully. This may be the most important financial transaction of your life.
What’s the real difference between a new home and an old one?
While each offers its own style and charm, the difference usually boils down to two things:
1. How the home fits into the buyer’s lifestyle.
2. The condition of the property.
Homes that are 10 years old or less are generally better insulated – or have dual-glazed windows or thermal panes – which translate into lower heating and cooling bills. And, in today’s rising energy cost environment, these considerations are significant. Although there are some exceptions, homes that have been built with all-electric systems, generally have higher utility bills.
Homes that range between 15 and 20 years old may be in need of new water pipes, especially if the old ones were galvanized and if a water softener was used. Water softeners and galvanized pipe can be deadly and, after 15-20 years, reworking the plumbing is usually required. Have a plumber or general contractor inspect the pipes. Needless to say, it can be expensive to re-plumb an entire system. Check the built-in fixtures and appliances for any signs of damage.
Flush toilets, test all the water taps and the electrical sockets, open and shut the windows, and try all the lights.
A window that will not open may be a sign of a more significant problem-for example, a wall may have shifted, or worse yet, it could indicate a problem with the foundation itself.
It is also a good idea to ask the seller for copies of past utility bills. Examine them for some insight into what you can expect monthly gas and electric costs to be.
Although newer homes may be free of significant physical or structural problems, there are other things to consider in making your decision.
Generally, room size and yard size tend to be smaller in some newer homes. While, on the other hand, they usually offer the benefit of the latest building and design technology. Many new homes also have more windows and natural light incorporated into their design plan, allowing for a more spacious feel and efficient energy usage.
Should a buyer get a professional inspection for the home they are buying?
Definitely. Hiring a professional home inspector can save a great deal of grief for buyers. The one exception would be when the home is new and carries a written warranty by the builder.
Many buyers mistakenly believe that the only reason to have a home inspection is to make sure that the house they’re buying doesn’t have defects serious enough to warrant backing out of the transaction. But there’s more to it than that.
Certainly, an inspection will usually reveal major problems that may even surprise the seller. The obvious ones are corroded plumbing, antiquated and unsafe electrical systems, or structural and foundation problems. And, the discovery of such problems may cause the buyer to re-think his or her offer.
Although a competent inspector can uncover deal-crushing defects, these problems are usually not commonplace. Typically, the seller will already have told the buyer about anything major. More often, inspections reveal less serious problems; problems that may not be serious but can be aggravating.
For instance, there could be a minor electrical defect or inferior ventilation of a heating system or fireplace. If so, the buyer is usually in the position of having the purchase price reduced, or the defect corrected. More important, it also prevents the minor problem from developing into a major disaster a year or two down the road.
There is, of course, the possibility that the home inspection will produce another outcome: everything is fine. In this case, the buyer gains peace of mind, confident about the major investment he or she is about to make. That, too, is an enormous benefit for the cost of the inspection.
Now, how does a buyer find a home inspection?
By asking their real estate agent, friends, or lender. Inspectors are also listed in the Yellow Pages under “Home Inspection Services.” But, a word of advice, don’t hire a contractor. Contractors earn their living doing repair and renovation work, so their recommendations aren’t likely to be as objective as those of a professional inspector.
Is real estate a wise investment?
There are fewer investments that have shown a better return. However, the key to investing wisely in real estate is understanding how the industry differs from others.
For example, when the defense industry dips, it usually shows a national decline and the stock prices of defense-oriented firms drop across the board. The same is true of most industries. They are impacted nationally.
That is not the case with real estate, which is actually an industry and investment driven by local conditions. One community may suddenly lose a manufacturing facility, and almost overnight the market is flooded with properties for sale. An excellent example is southern California. Several years ago, when defense cutbacks began an excess of homes went up for sale, increasing the supply and lowering demand. There, it was a buyer’s market. At the same time, Bakersfield, a community less than 150 miles from Los Angeles continued to experience high demand for real estate. With supply short, it was a seller’s market.
Obviously, the key to successful real estate investing, like stocks and bonds, is to buy low and sell high. But, how do you know when the “low” has been reached? Or, for that matter, how can you judge when you property may be peaking in value?
Some investors rely partially on the media. They read the daily newspaper, watch television and follow the trends. Although the media provides a good deal of information, remember that by the time things are printed or broadcast, the news may be old.
For instance, you will find statistics frequently quoted in the media that have been supplied by the National Association of REALTORS (NAR). But, NAR statistics-like most- tell you where things have been, not where they are going.
So what can you do?
First, check local economic indicators. If, for example, a community depends on defense spending, and there is a government cutback, you can be assured that your area will be impacted.
Even if the community does not have a major defense contractor, it may have subcontractors.
The local chamber of commerce can frequently help. They usually have information on which companies are moving in and out of an area.
Logically, the relocation of a firm into a community generally indicates that demand for real estate in that marketplace will increase-while if firms are moving out of the area, housing demand will often shrink.
Aside from economic indicators, check real estate trends and cycles. Talk to a real estate agent. They can provide statistics on how quickly homes have sold, how prices have fluctuated in the past six to 12 months, and projections of future home sales. They can show you how today’s market compares to last year’s. Are sales headed up? Down? The same?
The answers will not only help you determine what the market is like in your area, but they will also be critically important in helping you determine when and where to make your real estate investment.
Does a home warranty protect a buyer in the event something goes wrong after they have purchased a property?
Sometimes. That’s because home warranties are often times misunderstood and not every warranty provides the same protection. All warranty companies are not equal, either.
Warranties, of course, were designed to protect buyers from problems that emerged after they moved into a dwelling. For example, if a major appliance breaks or the roof leaks, the ideal warranty kicks in and pays for the repairs.
On the surface, this sounds simple and straightforward. But, most of the time it is not.
First, all warranties differ. Aside from the obvious differences, the amount of deductible required, they may also vary as what is covered and what is not. For instance, with some warranties if the hot water heater works on the day of closing, but suddenly does not work six months later, then it may be covered. And, with other policies if the water heater was not in good working condition when the home was purchased, and it breaks a week or two later, there is no coverage.
Warranties can be critically important when it comes to new construction, too. Obviously, the reputation of the builder is an important consideration. However, problems with new homes can be enormously expensive if they are not covered by a warranty.
There are two types of defects when it comes to new homes – patent or latent.
Patent are those problems that can be seen. Cracked plaster, a fence that is off-kilter, etc.
Latent problems develop later, and may not show up for five or six months. Ground shifting, for example. Latent problems are usually more expensive than patent problems.
Thus, the warranty for a new home can be one of the most important documents executed during the buying process.
Whether you’re purchasing a new home or a resale, remember that warranties definitely have a place when it comes to protection and peace or mind in the real estate transaction, but make sure that you check them out carefully.
Is a final walk-through, an inspection of the property by the buyer before they move in– really important?
Yes, it is. The intent of a pre-closing inspection is to give the buyer one last opportunity to verify that they are getting all that was promised in the sales contract. Although buyers still have legal recourse if they discover-even after closing-that the condition of the home is not as it should be.
The best time to identify problems is before closing when the seller will be motivated to correct any deficiencies in order to close the transaction.
Typically, a buyer takes possession of a property one to three months after signing the sales agreement. But, a lot can happen before the actual move-in. Appliances and fixtures can break down, and walls, carpets and doors can be damaged during the seller’s move-out. Sometimes the seller will simply have forgotten that he or she had agreed to leave the refrigerator or window coverings with the house. Whatever the reason, problems identified before closing have the best chance of being remedied.
If possible, schedule the inspection right before the closing, such as the day before. Ask your real estate agent to attend the inspection with you. What should you be inspecting? Using a copy of the sales contract as a checklist, first make sure that all items that should be in place (appliances, built-in furniture, window coverings, fixtures, etc.) are there.
Test each appliance to make sure they work properly. Test all electrical switches and the garage door opener, if there is one. Run the garbage disposal and turn on every water faucet, checking under the sinks for leaks. Flush the toilets. Inspect the floors, carpets, walls and doors for recent damage.
If you discover that something is damaged or missing, make a note of it and inform your agent immediately.
In most cases, the seller is usually able to take care of small problems immediately, either by making a needed repair or offering compensation to handle it. And, if there are major problems the seller can even sign a statement acknowledging the deficiency and agree to correct it. Although pre-closing inspections take time and maybe inconvenient, they are important and well worth the buyer’s time.
What are “contingencies” and why are they important?
A “contingency,” is an escape clause that is added in writing to a contract that allows a buyer to back out of the transaction if certain conditions aren’t met.
Some contingencies often called “riders” – like attorney approval of the contract, or the passing of a home inspection-are obviously designed to protect buyers from a poorly written contract or a defective home.
Other purchase contingencies may hinge on the buyer’s current living situation, or his or her cash flow. For example, when it comes to contingencies many first-time buyers can be better prospects for a seller’s home than move-up buyers. Why? Because offers from homeowners usually are contingent upon the sale of their present home. And, even if a move-up buyer has an offer for their home in-hand, their buyer’s offer may be contingent on another contingency (or sale) and so on down the line. If one transaction in the chain falls through, they all might.
Cash offers can also be more attractive to sellers.
After all, the seller will get their money at closing whether or not the buyer has cash or takes out a loan.
True, but cash offers don’t require lender approval, and loan approval is never a certainty and may delay or prevent closing. (Incidentally, for this reason, buyers who get pre-qualified for a loan have an edge over other buyers. A pre-qualified buyer is the same as a cash buyer.)
Buyers offering a larger-than-customary amount of “earnest money”, (a deposit that accompanies an offer) can be more appealing too. More money deposited with the signed contract often demonstrates greater sincerity and motivation to close the transaction.
Frequently Asked Questions - Selling
How Much is Your Home Worth?
In today’s fluctuating real estate market, answering that question can be extremely complex. Generally, there are four criteria that can help homeowners determine an accurate as well as maximum selling price for their home.
The first: investigate area trends. Check with a real estate agent to determine the current selling price of homes in your area. Real estate firms generally survey properties in the surrounding areas and translate that to computerized reports divided into specific communities. Compare your home with similar homes that have sold. This should provide you with an idea of what homes are being sold for as opposed to what they are listed for.
Next, pay attention to “migration” trends and see if people (and businesses) are moving in-or out-of the area. One of the best ways to track movement is to read the business section of the local newspaper or talk to the Chamber of Commerce. If there is a lot of movement into the community, chances are home prices will be going up at a relatively rapid rate. Obviously, if there is heavy migration out, prices will be flat or could even drop.
Remember, too, that two side-by-side homes can command radically different prices.
Part of the reason can be attributed to certain features that may enhance the value of the home in the buyer’s eyes. For instance, older homes that have been upgraded with new fixtures, windows or room additions command higher prices than homes that remain unchanged. In many cases, with minimal expenditure, these price-enhancing features can be added and sellers can often increase the property’s value by thousands of dollars. Unchangeable elements such as lot size, or single-story versus two-story can, of course, impact the value of adjoining homes.
Perhaps one of the most critical elements in selling a home, is pricing. By carefully following the local real estate market, or contacting a real estate professional, not only can sellers determine the right time to sell but, most importantly, they can also ascertain the correct price to list the property at to get it sold.
Why Do Some Homes Sell Quicker than Others?
They are priced right. Pricing is usually the number one determinant as to how short or how long a home will be on the market.
Obviously, the property has to be priced competitively, but do not set the price based upon what you heard a neighbor received for their home.
Adjacent homes can be radically different. They both may have the same floor plans, but improvements, a more desirable location in the tract, and other seemingly small variations can make a significant difference when it comes to price.
In determining the right price, one of the most important traits you need is objectivity. Homeowners, naturally, have an emotional attachment to their home, and because of their feelings they oftentimes overestimate what their home is worth.
Despite the attachment, try to be practical and logical. Make a competitive study of recent sales that are comparable to your home. Evaluate price per square foot, age, condition, location, schools, and extras.
Remember, that the value of your home can be impacted by developments that are not yet in place. Is there vacant land nearby? If so, what businesses, or structures will be erected there in the future? Is it a desirable addition to the neighborhood? If there is vacant land, visit the local planning and zoning commissions to see what might be built or, check with a local real estate professional to help you find out what development plans might be in the offing. He or she should also explain the elements that go into pricing and why. And, ask the associate about a CMA (Comparative Market Analysis) and what it means.
Remember, too, that little things can make a big difference once the home has been priced. Cosmetics are crucial. Spruce up the property as much as possible.
A little exterior paint, some new shrubbery, and making sure that the house is always neat and clean can make a tremendous difference. The most important impression is the first-and the first thing buyers see is the exterior. It should look good.
To get an idea as to how price is determined, contact a local real estate professional. Ask them to carefully choose an associate who knows your neighborhood.
In today’s market, there are buyers-for homes that are priced competitively.
A lack of “action,” usually indicates that your property is one of those that has been priced incorrectly. Most important, be objective. Try to look at your property as if you were a buyer going through it. What do you like? Dislike? How does it compare to other properties in the area? Is it worth more? Less?
Answer those questions objectively and you will not only be on the way to pricing your home correctly . . . but to selling it too.
Thinking About Selling Your Home?
If so, there are two ways to go about doing it — sell it yourself or engage the professional services of a REALTOR®.
Obviously, the advantage of selling the home yourself is you do not pay a commission. But, statistics show when you team up with a real estate professional, the chances of selling your home in a shorter time span (and frequently for more money overall) are much better.
There are pros and cons to each technique.
To determine which road you are going to take, start by asking yourself one question – If you needed a medical operation would you perform it yourself, or have a professional do it for you?
Selling a house in today’s market is not like it was a decade ago. The market, as well as consumers, are much more astute and the laws more complex. Liability and disclosure can complicate the sale.
Perhaps the biggest obstacle a seller faces when they decide to market their own property is emotional attachment. Many owners are blind to flaws that a real estate professional can see. And, a good Realtor goes further and recommends steps the homeowner can take to make the property more appealing-a fresh coat of paint in the kitchen, replacing a rusty mailbox, or removing clutter to make the home appear more open. The objective view can be the difference in making a sale.
An experienced Realtor can also provide a seller with a Comparative Market Analysis, so the owner knows what the home is actually worth, instead of what they feel it’s worth.
Which Home Improvements Add?
While some home improvements can add significant dollars to the resale value of a residence, others are barely worth the investment. So how can homeowners decide which improvements will add significant value and which won’t?
Here are a few tips on cost-effective improvement; upgrades that can make the difference in the sale price and add value to your property.
As a rule, kitchens and baths are the two areas that most often make the difference in a sale. They make the most impact on buyers, and definitely impact what buyers perceive the property is worth. But, kitchens and baths are not inexpensive to upgrade.
The national average for remodeling an entire kitchen is more than $20,000 with some running upwards of $30,000. Complete remodeling can include cabinets, floors, counters, sinks, appliances, lighting fixtures and new windows.
But, there’s a way to put a new look on this important area without spending significant money. For a relatively low cost, homeowners can make spot improvements. For example, for as low as $1,000 the existing countertop can be replaced with a Formica top. For $2,500 to $3,000, the existing cabinet faces can be replaced with solid oak faces. Homeowners can buy a new sink at a home furnishing store and have a contractor install it for approximately $300 – $400. The end result is improved appearance and usually a higher selling price for relatively minimal expenditure.
Other areas that influence price: Central air conditioning is an important feature for which buyers will usually pay extra. Room additions, on the other hand, may add value, but may not end up paying for themselves. Upgraded carpeting, top-of-the-line windows, and vaulted ceilings can command higher resale prices, but it is unlikely that the seller will be able to recoup their original investment.
Existing features that have diminished with age can usually be repaired without a lot of added expense. Hardwood floors, for instance, cost $1.50 – $2.00 per square foot to refurbish, but it is a good investment because buyers are willing to pay more for the refinished appearance.
For older homes, people are more energy conscious, so improvements in the insulation of windows, doors and storm doors are smart investments.
In general, neutral, light and bright are the best rules to follow-a neutral decor, freshly painted walls and clean carpeting also help to sell a home faster.
Over Pricing Property?
A high price conveys the message that the seller may not really be interested in selling. And, when a home is priced too high, agents and buyers usually just cross it off their list and move on. After all, there are plenty of other listings.
Of course, deciding the value of a home isn’t an exact science, so it’s understandable that a seller might put their home on the market with an asking price that is on the high side.
Additionally, most of us believe that our homes are really “worth more” than the one down the block, around the corner or the one next door that was just sold. And, if we are wrong, we can always drop the price later, can’t we? Yes, but by then, the seller may have not only lost potential buyers, but they may have also driven off interested Realtors-and Realtors are the prime source of buyers. Generally, they bring the buyers.
When a property is put up for sale, the first 30 days are the most critical. Statistics show that’s when most buyers (and Realtors) see the property. Interest is highest at this time. But, the higher price the property is on the market, the fewer the prospects (and Realtors) will view it. Thus, the initial period is critical with the proper pricing.
Some sellers, however, believe that if someone is really interested they will counter-offer. Some will, some won’t. Some well-qualified buyers may just walk away. The bottom line is a high priced listing will turn many buyers off.
Still, a seller wants to be confident he or she is getting the best price for their home.
The way to accomplish this is by talking to a real estate agent before listing the property. Ask for a comparative market analysis-that is, research what similar homes in the area have sold for recently. Compare your property to those, and have the agent help you calculate a fair market value. Be objective-even though it is your home.
Remember, an over-priced listing will usually result in an unsold property.
How to Make a House Look “Bigger and Better”.
One sure way for your house to appear larger-and more appealing-is if clutter is eliminated and furniture and household goods are reorganized.
In fact, the time to have a garage sale is before you put your house on the market, not after it is sold! When you decide to sell, start going through your closets and cupboards, eliminating items you don’t want to keep.
Do the same in the garage and backyard.
Get rid of, or store, the odds and ends. It’s interesting to note that the more someone lives in a home, the more used to the clutter they become.
Unfortunately, closets, cupboards and garages brimming with “old treasures” make a home look small and cramped to a prospective buyer. Sellers should also carefully examine their furniture, and consign items that are not needed for the storage or the garage sale. Most homes occupied by the same owner for several years tend to be somewhat over-furnished. Erring on the side of space, not clutter, makes for a more marketable home.
Another “item” that adds to the clutter of a home are excess knickknacks. Scrutinize the kitchen for rarely used utensils/gadgets; miscellaneous items in closets and cupboards, even small furniture and throw rugs, that can be neatly stored.
Pack or give away clothing that will not be worn as well.
Rearrange and organize. Remove as many articles as possible from the kitchen and bathroom countertops to the cupboards below-they’ll still be within handy reach in the newly created space. Organize closets. Clear off your nightstands and bureaus.
Size up the arrangement of your furniture-any room for improvement there?
Examine the walls and windows. Do they need repainting or new window coverings?
For some expert, objective advice, have your real estate professional go through the home. Realtors know what enhances a property’s appearance — and what hinders it.
One last hint — don’t forget the outside. Sweep the garage and sidewalks, trim the lawn and bushes, wash all the windows, inside and out. It all helps to make your home look fresher, lighter-and larger.
How Can Two Similar Homes Vary in Price by More Than $10,000?
Forgetting, for a moment, the interior improvements that set one home apart from another, there are exterior factors that also influence the price. For instance, homes on primary ingress and egress streets- (that is, the main streets that lead in and out of a tract) -generally appreciate more slowly than those within the tract that are not on primary streets.
Primary ingress/egress streets generate more traffic and are, therefore, generally less desirable. Thus, they have lower prices.
Within a tract, a home on a cul-de-sac may generate a higher price for the same reason-less traffic. Cul-de-sacs are frequently like a maze and they discourage drive-throughs, which is, of course, a definite benefit to residential privacy.
Even properties on one side of a street can be worth more than a similar property across from it. Why? Certain communities, because of their name, are more prestigious than others. Beverly Hills, California, of course, is one. It is known worldwide for its high-end shopping, expensive housing and impeccable name. In sections where Beverly Hills is divided from other cities and/or communities by a street, the homes on the Beverly Hills side of the avenue command a higher price than those in the non-Beverly Hills city across from it.
Existing homes may differ radically in price for another reason-one homeowner wants to sell, and the other has to sell. The motivation for each is quite different, and so may be the pricing strategies.
Some other factors that influence price: What commercial developments are adjacent to the tract? How (un)desirable are they? And, don’t forget supply and demand.
The wise buyer checks one other thing-a communities master plan. This is a must, especially if a tract (or home) is surrounded by vacant land. Most communities have one. It is usually drawn up by planners within the city or county and approved by a local planning commission. Find out what is going to be built nearby and determine how it might impact the value of the tract. All this, of course, takes time and homework. But, it is well worth it, especially when you consider that the purchase of a home is usually going to be the largest, single financial investment most people make in a lifetime.
Should you Appraise your Home Before Putting it on the Market?
It isn’t necessary, but an appraisal will give a good indication of the price the seller will actually get for their property. A real estate agent can give you similar reliable data to determine current market value.
First, to determine the asking price, a seller’s agent will look at the “comps,” the price for which “comparable” homes in the area have recently been sold.
Based upon these prices, the seller should adjust what they are asking. For example, if similar properties in the area are selling for $210,000, then trying to get $250,000 usually does not make sense. Thus, before putting the house on the market, a seller should review the “comps,” which can be obtained from a local real estate professional.
The appraisal process used by a licensed appraiser is more theoretical than a “comp,” and doesn’t predict what a buyer will be willing to pay. Why would anyone ever get an appraisal then? Although rarely needed by buyers or sellers, appraisals are normally required by lenders who are considering making a loan.
However, sellers of expensive, custom homes may get appraisals, because there may not be any homes in the area that compare. Buyers of these one-of-a-kind homes will also have more confidence in an asking price that is supported by an appraisal.
Before determining an asking price, sellers should give their agent a list of major improvements done to the home, such as a new roof or upgraded heating system.
This will help the agent consider all the factors when recommending a price.
It will also put him or her in a better position to sell the house-and all of its features for the best possible price.
What is the MLS?
MLS stands for “Multiple Listing Service,” which is usually a computerized listing of virtually all the homes that are for sale in a specific area.
When a Realtor lists your property for sale, they pay a fee and your home is placed on the MLS system. The big advantage to sellers is that the MLS is the #1 resource used by buyers (and agents) to locate homes.
Properties that are not listed (usually those being sold by their owners) are not on the MLS-thus there are many buyers and Realtors who will not be exposed to the home.
The MLS has become such a standard in real estate that no serious broker would think of trying to sell real estate without it. It would be like an accountant trying to work without a calculator.
About the only residential brokers who might not use the MLS are those who exclusively handle foreclosed properties, or high-end homes owned by celebrities and the like.
The MLS provides a surprising amount of detail, depending upon the area of the country it may include the location (by zip code); size of the home (square footage); size of the lot; number of bedrooms and bathrooms; extra rooms such as a den, family room, formal dining room, or enclosed patio; amenities such as a backyard, fireplace, hot tub, pool, kitchen features, new carpet and drapes; capacity of garage; age of home; and. of course, the selling price and terms.
Buyers can narrow their house-hunting searches dramatically by using the MLS. For instance, their real estate professional can do a computer search and ask for a listing of all homes within a certain location and price range that have two or three bedrooms and that are not more than ten years old. Not only will this request generate a brief list of viable possibilities, it also helps buyers gauge, roughly, what they can expect to get for their money, and to compare the value of the homes listed.
Thus, the MLS is more than a system that lists properties. It’s an aid to both buyers and sellers, and is a definite asset to consumers when it comes to real estate.
What is Escrow?
Escrow is a process that begins when the purchase offer papers are signed by both parties, and ends when the loan is approved and all the necessary requirements have been fulfilled by both the buyer and the seller.
The escrow holder is an intermediary and an agent of both the buyer and seller.
The escrow holder is given the buyer’s deposit and holds onto all funds until the agreement is finalized. They notify the seller when the deposit has been received and if the check has cleared the bank.
The escrow holder also draws up a set of instructions, itemizing things that have to be done to the property before it is sold and the title is transferred.
For example, if the seller is required to supply a termite inspection, the escrow holder would track this obligation and make it is fulfilled before any funds are transferred to the seller. Findings in the termite inspection report must be corrected on or before the close of escrow. If the report calls for a plumber, roofer or other contractors, the agent would advise the seller and get authorization for work to be done.
The escrow company is typically the title company.
The escrow/title company provides a complete ownership history of the property and any liens on record in the preliminary title report. Anything that is out of the ordinary, such as condo liens, judgments, etc. against the buyer and the seller must be clarified prior to the close of escrow.
The escrow process can be any number of days depending on what is agreed upon between the buyer and seller. To assure a timely closing, the buyer should do things like inform, the escrow holder of the name and phone number of their insurance agent as soon as possible. The homeowner insurance policy needs to be ordered early, so verification can be made with the lender. The lender will not fund a new loan without a homeowner policy. If there is a delay, the escrow process may be held up.
First, the responsibility of who pays for closing costs is always negotiable. Local custom may dictate which fees the buyer will pay and those the seller pays.
Typically, the buyer pays for home inspection services and escrow, deed preparation and recording fees, depending upon what is customary for the county the property is located in. He or she may also pay for title insurance since this is required by the lender. The buyer is also responsible for any fees or costs associated with obtaining the purchase loan.
The seller customarily pays the real estate agent’s commission, as well as costs associated with transferring an unencumbered title, such as a title search, reconveyance deed and documentary transfer tax.
Often, a seller will sweeten the deal by offering a one-year home warranty.
Who will pay for what closing costs customarily differ from county to county and should always be clearly spelled out in the purchase offer. A creative sales associate will consider the cash, income and tax situation of the home seller and the buyer when constructing an offer. For instance, if the buyer is short of cash, the agent may ask the seller to pay the buyer’s loan points upfront in exchange for some other concessions from the buyer. In this scenario, the buyer and seller benefit and both get what they want.
What is a Home Warranty?
It is a service contract that helps protect homeowners against the cost of unexpected repairs and replacements of covered major systems and appliances that break from normal usage.
What Does a Home Warranty Cover?
– Water heater
– Heating system
– Plumbing system
– Ceiling fans, central vacuum, ductwork
– Range, oven, cook top, built-in microwave
– Dishwasher, garbage disposal, trash compactor
– Electrical system, telephone & doorbell wiring
What it Doesn’t Cover
– Doors & Walls
– Items not built-in
– Well pumps
– Washer & dryer
– Air conditioning
– Swimming pools, spas
A warranty normally excludes pre-existing conditions, such as items that are not in working condition when coverage is put in place.
Where can I get One?
In most cases, warranties are available through real estate companies and their agents.
Many times a seller pays for and provides the coverage to the buyer as part of the transaction.
Ask for a “seller provided” warranty when making an offer on a house.
Many buyers purchase them for their own protection.
How Much Do They Cost?
The cost for a basic one year home warranty ranges from $295 to $400.
Optional coverage is per added item, such as pool, spa or well pump.
Each contract calls for a deductible payment or service call fee from the claimant directly to the repair contractor. This fee is usually $35 to $50.
The warranty company picks up the cost of repair above that amount.
Home warranties have proven to be well worth the cost of coverage.
As a buyer, use it as a negotiation tool in a purchase contract.
Why a Home Warranty
Sellers: A Home Warranty provided by the seller will be viewed as a benefit to the buyer. Adding a home warranty to your listing adds confidence and might result in someone purchasing your home over a newer home. Many people are nervous about old appliances and fixtures. Buyers are much more comfortable with a house that includes a one year warranty. The warranty can be promoted in the advertising as a drawing feature of the home.
It protects you should something go wrong after the buyer moves in. If a covered system or appliance repair is needed, the Buyer calls the warranty company, not you!
This after-sale liability protection is well worth the cost of coverage.
Pay at Closing
There is no charge to the Seller until closing, it is typically paid through escrow.
Market Value vs. Replacement Cost
When deciding how much insurance you need to cover your home, think replacement cost rather than market value.
Most people tend to think about the market value, which is the selling price of your home.
This value goes up or down based on the economy, the supply and demand for homes in your neighborhood, local employment levels and other factors. Replacement cost, on the other hand, is the amount it would take to rebuild your home at today’s prices.
If your home suffered devastating damage you want enough insurance to pay the cost to rebuild.
Make sure your home and personal property are adequately covered.
It is important to have your insurance agent help you estimate how much coverage you’d need to actually replace your home and cover your personal property.
The amount of your mortgage balance is totally irrelevant to the amount of homeowner guaranteed replacement cost insurance you should carry.
In many states, over insuring for more than replacement cost is illegal-because over insurance encourages arson.
Be sure your guaranteed replacement cost policy includes a building code endorsement. That means the rebuilt home will be constructed to today’s building codes, not the codes in force when your home was originally built.
Start with a guaranteed replacement cost insurance policy.
Raise your deductible to $500 or $1,000 for each loss.
Compare policy costs with several insurance agents.
Consider whether you need depreciated or full replacement cost personal property insurance.
Review your liability coverage to see if an umbrella policy will give you better protection at lower cost.
Take Inventory Now !
Imagine coming home some night and finding your home burglarized, vandalized or burned. Would you remember all the items missing or destroyed, and their value?
Keep Accurate Records of Your Household Possessions.
Make a list of items in each room as you move in.
Write down serial numbers if they have them.
Take photos or videos of items in each room.
Put the owner’s manuals of items you purchase along with their receipts together.
Keep in a safe storage spot.
Burglary Prevention Tips
Put up a Beware of Dog sign.
Give your home a lived-in look.
Keep garage doors closed and locked.
Leave a radio on. It signals that someone is home.
Trim shrubs around doors and windows so that anyone can be seen more easily.
Set inexpensive timers to turn on lights in different rooms at different times.
Leave shades and drapes open. If closed, it’s a sign you’re gone.
Place lamps close to windows to obscure a view inside.
Install outside lighting that is activated by motion.
Join or start a neighborhood watch program.
Selling A Home
Time to Sell – You Want
– The right price
– At the right terms
– In the right amount of time.
To Reach These Goals:
– Make your home look good.
– Price it at market value right away.
– Use real estate professionals.
Make Your Home Look Good
It’s important you make your home look presentable before you put it on the market. Exterior and interior paint will give you the best return on your money.
Clean up the yard, fertilize and add some flowers for that most important first impression.
Have an agent preview your house to give you suggestions.
If yours is an older house, your agent should recommend a termite and or property inspection at the beginning.
This can work to your advantage in a couple of ways. Negotiations go smoother if you are aware of problems at the beginning.
Allows you time to fix or correct things before an offer is brought in, which may give the buyer the confidence to offer more. Knowing of problems up front will give you and your agent more time to come up with ways to negotiate around them, should you choose not to fix them.
Price It Right
Pricing your house at market value from the start will typically result in the best price you will get for the property in the least amount of time and inconvenience to you.
Listing your property high at first only helps to sell the other houses like yours on the market. Remember, buyers preview a lot of homes so they know what is overpriced.
The sales price also has to appraise at market value in order to get a loan on it.
Pricing a Home is Key
When you figure in extra mortgage payments, property tax, insurance, the time and energy to keep your home looking good and the inconvenience of having your home on the market a couple extra months, overpricing isn’t practical.
Real Estate Professionals
Real estate today has become a business that is very labor-intensive on many fronts. Continuing education is required to stay up with all the changes and requirements for a real estate transaction. Most homeowners don’t have the time or knowledge to successfully market and sell their home and get the best price.
To save a commission, some people start marketing their home by FSBO (for sale by owner). Some are successful, while most eventually list with an agent.
Most buyers work with an agent, because they don’t want to go through the buying process without the use of a knowledgeable professional which they essentially get their service for free. Since the commission on a listed house is typically the source of income for the buyers agent, FSBOs get far less market exposure. Agents typically prefer not to work with FSBOs as they wind up doing much more work. Why – because FSBOs typically don’t have the knowledge and required forms needed for selling a home so the agent winds up providing for and consulting with the owner.
Real estate professionals have the needed information to arrive at market value. A real estate agent will conduct a Comparative Market Analysis(CMA) using the Multiple Listing Service (MLS). This involves a survey of homes that are on the market or have recently sold that are similar to yours. The agent will advise you on the additional value (or deficit) of your home’s unique features and factor that into the equation.
Going with the agent who recommends the highest price isn’t always the best. This technique is used to get the listing. Dismiss any agent who can’t justify a high price estimate. Sellers mistakenly believe that they should price their house higher knowing that they can come down in price if it doesn’t sell. Buyers shop around before buying and recognize value in a specific price range because of comparison shopping.
Homes that wind up on the market for a long time typically sell below market value.
A quick word about commissions. Commissions are negotiable. They can vary between 4%-10%, depending on the type of property, current market conditions, and the sellers motivation. 6% seems to be most typical. Many people wrongly assume the whole commission goes to one person. Typically it is divided four ways: the listing agent, the listing agent’s broker, the buyer’s agent and the buyer’s agent’s broker. Referral fees and franchise fees many times are a factor also.
Getting your home listed at 5% may not net you more then if you listed at 6%.
When a home is listed, the commission is split between the listing office and the buyers agent’s office. When agents show properties to potential buyers, one thing they generally look at is how much commission is being offered. Agents typically will show homes offering 3% before the ones offering 2.5%. If your home is offering 2.5% to the other agents, it will get fewer showings meaning fewer people will even look at your house. The result: you will be helping other sellers get their homes sold first. If the listing office offers 3% to buyer agents on a 5.5% or less listing contract is the best of both worlds. This scenario reduces costs to you along with good marketing incentives for other agents.
MLS fees, insurance and membership dues can run thousands of dollars a year for each agent. There is the cost of overhead, computers, office equipment, transportation, signs, advertisement and so on. It’s a business with many expenses without a weekly paycheck.
Marketing Real Estate
The MLS is still the best effective way to market your home to the public.
The internet is fast becoming the preferred method for finding homes. More and more potential buyers start looking for homes on the internet. A tremendous amount of information can be found on the internet. Soon it will be the norm for buying and selling real estate.
Now one can take a virtual tour of a home at the click of a button. More and more homes will be marketed this way, especially high-end homes or special property. Real estate companies that use this technology will be serving their clients better. Flyers on a For Sale sign are common today, virtual tours will be common tomorrow. See examples of Virtual Tours.
A FOR SALE sign should be placed in your front yard. Not allowing a sign on you property will greatly decrease your marketing power. Use signs that have a box for flyers about the property.
A Lock Box
It’s important that you have a lockbox so agents can preview and show the property during the day. Not allowing a lockbox will dramatically reduce the needed exposure to properly market your home. Lock boxes are very secure devices that records who uses it.
Agents don’t like to show property if access is an inconvenience. Use a lockbox.
Advertising in property magazines, newspapers and open houses are additional methods used and probably the least effective ways to market real estate.
Does Size Matter
Is a bigger real estate company better?
Most large franchises want sellers and their agents to believe that.
Which Company is the Best?
Today, most of the large “name brand” companies were bought out and owned by one company – NRT. Companies such as Coldwell Banker, Contempo, Cornish & Carey are owned by NRT. Larger companies can’t be as flexible on commission because they have more layers to feed. Smaller companies have less overhead with less or no other ownership involved to feed. As a result, a lower commission can be agreed upon with the same effective marketing a large company offers. Talk with agents from different companies to find out what services they can provide and decide what is the best value for getting your property sold.
Choose an Agent / Company
– Good local market knowledge
– That markets through the MLS
– Has good website and marketing
– Give the best value for commission rate.
Selecting An Agent
Real Estate Agent Needed
At some point during your search to buy or sell real estate, you will need the services of a real estate agent. Selecting an agent can be confusing.
There is a way to determine who is most likely to succeed in helping you get your price and terms when selling, or finding the perfect house when buying.
Questions to Ask a Prospective Realtor
Do you work as a full-time Real Estate Agent?
How do you market your property?
Do you have a full-time Assistant to see that no details are overlooked?
How do buyers contact you?
Are you marketing real estate on the internet?
If I choose to do a tax-deferred exchange, are you experienced in such transactions?
In what ways will you encourage other Real Estate agents to sell my home?
Do you have a system to follow up with other agents so that we get valuable feedback after every showing?
How many properties have you sold within the past 30 days? 90 days? 6 months?
Do you have a list of references that I may check? Are you on the internet exposing my property to buyers instantly?
What is my property worth? What listing price do you recommend?
How did you arrive at that price?
How will you assist in my relocation plans?
Do you have a written Specific Marketing Plan designed to sell my property quickly and for top dollar?
Are you affiliated with a Mortgage Broker with over 300 wholesale lenders & have underwriting experience?
Do you guarantee my satisfaction by allowing me to exit the listing agreement at any time if I am not happy?
If the agent you are interviewing does not answer the above questions to your satisfaction, you should probably find another who does!
Setting the Price on your Home
The three factors to consider in selling your home: Location – Condition – Price.
Your home’s location and overall setting influence its value. A home inside a quiet subdivision sells for more than the identical home on a busy street. Remote areas typically sell for less than close-in areas. Views, streams and trees usually enhance value. You obviously have no control over location.
New homes enjoy a marketing edge over resale homes because they are shiny and clean. And builders enhance their appeal by offering model homes (clean, bright, decorated in current colors and amenities) for buyers to examine.
If IBM stock is trading between 110 and 120, it does no good to insist on selling at 150. Likewise, your home must be priced within the appropriate range. You must actually “sell” your property twice: first to a buyer and then to an appraiser. The buyer is more subjective and compares the amenities of your home to those of other homes in the same price range. The appraiser is more objective and compares age, size, and cost-identifiable features in your home against other properties that have sold.
Your agent must use his experience and expertise to fine-tune the price by taking into consideration all of these variables.
Most homebuyers go about the process completely backward! That is they spend several weeks, months and sometimes years, looking at Real Estate ads, driving neighborhoods and attending open houses looking for the perfect home.
Once they’ve found the house of their dreams, they place an offer to purchase it subject to obtaining financing. Then they shop for a loan. More often than not, it is above their means and they lose the sale because they can’t finance it. Not only are they frustrated but so is the inexperienced agent who chauffeured them around for a year.
The savvy buyer of today shops the loan first and then knowing exactly how much they can afford, will then seek only properties that are within their reach.
There are two methods of doing this. The standard way is to call or meet with a loan agent, tell them their financial and credit history, have the agent “run the ratios” and then tell the borrowers about how much they will qualify for.
The flaws in this scenario are that the borrowers often forget to tell about their 5 late credit card payments, their new boat payment or push their income figures beyond reality.
The preferred method is to complete an application, provide income and employment records, have the loan agent run a credit report then actually submit the file to a wholesale lender for underwriting then receive approval and commitment for a loan for the borrower.
This is also a powerful negotiating tool when presenting an offer to purchase.
I don’t know of a single seller who would prefer to accept an offer from a buyer subject to obtaining financing over the buyer who already has a loan commitment! This can and will save you money when negotiating the contract. As a hunter once told me, you don’t go out looking for a bear, find him then go and get your bullets!
Get a loan commitment first, then find your dream house.
What is Tax-Deferred Exchange?
Under Section 1031 of the Internal Revenue Code, owners of real estate held for investment or use in a trade or business can swap their property tax-free for “like-kind” real estate. Exchanges are made for people wanting to stay invested in real estate, increase their leverage and to avoid paying hefty taxes upon the sale of property.
– Rental Houses
– Retail Properties
– Raw Land
– Office Buildings
– Personal Residences
– Dealer Property
– Partnership Interests
Reason to Exchanges
– Restoring Depreciation that will soon expire – by exchanging one property for another of greater value.
– To upgrade the size and/or quality of investment. An exchange can be utilized to combine the equity of one or more properties into a larger singular investment.
– To change investment location. An exchange can be executed in anticipation of market trends to maximize appreciation potential.
7 Steps for a Successful 1031 Tax Deferred Exchange
Step 1: Consult with your tax and financial advisors to determine if a tax-deferred exchange is appropriate for your circumstances and compatible with your investment goals.
Step 2: Listing the Relinquished Property for sale with a licensed real estate broker. During the first step, the Exchanger will list the Relinquished Property with a real estate broker. The broker/agent will disclose the intent to complete an exchange in the listing agreement.
Step 3: Offer, Counter Offer and Acceptance. The Exchanger enters into a contract with the Buyer for the sale/exchange of the Relinquished Property. The broker/agent discloses the Seller/Exchanger’s intent to exchange into the Purchase Agreement and Receipt for Deposit.
Step 4: Open escrow for the Relinquished Property and coordinate with the Facilitator. The Facilitator prepares the exchange agreement and coordinates with the escrow holder to close escrow as Phase I of a tax-deferred exchange. Important: The exchange agreement must be in place and signed by all parties prior to close of escrow. Additionally, all earnest money deposits should be placed with the title company.
Step 5: Replacement Property Identification. After closing escrow for the sale of the Relinquished Property, the Exchanger must identify all Replacement Property within 45 days from day after close of escrow.
Step 6: Contracting for the Replacement Property. After closing on the Relinquished Property the Exchanger has 180 days to acquire the Replacement Property. With the help of his or her agent the Exchanger enters into a contract to purchase the Replacement Property from the Seller. In the contract to purchase the agent discloses the Exchanger’s intent to complete the exchange and obtains the Seller’s cooperation.
Step 7: Open escrow for the Replacement Property. The Facilitator prepares the Phase II Exchange Agreement and coordinates with the Replacement Property Escrow holder. The funds held in trust by the Facilitator are placed in escrow and the Replacement Property is purchased by the Facilitator from the seller. The Facilitator then transfers the Replacement Property to the Exchanger and the transaction is closed as Phase II of a delayed exchange.
Identification of Replacement Property
Regardless of the number of relinquished properties transferred by the Exchanger as part of the same exchange, the maximum number of replacement properties that the Exchanger can identify is as follows:
3 Property Rule: Three properties without regard to the fair market values of the replacement properties.
200 Percent Rule: Any number of properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinquished properties as of the date the relinquished properties were transferred by the Exchanger.
Exception – 95 Percent Rule: Any number of replacement properties identified before the end of the identification period and received before the end of the exchange period, but only if the Exchanger receives before the end of the exchange period identified replacement property the fair market value of which is at least 95 percent of the aggregate fair market value of all identified replacement properties.
Glossary of Terms
Accommodator: A principal involved in the exchange transaction who agrees to assist the exchanger to effect a tax-deferred exchange. Same as Facilitator or intermediary.
Accommodating Party: In an exchange of properties, there is always a person or entity that steps in to accommodate or facilitate the exchange transaction. Depending on how the transaction is structured, the accommodating party may incur additional liability in their efforts to assist in the exchange.
Acquisition Property: Replacement property
Actual Receipt: When the Exchanger actually receives the funds from the sale of the Relinquished Property. Receipt of cash by the Exchanger before he receives the Replacement Property may be enough to destroy the tax-deferred treatment of the transaction.
Adjusted Basis: Generally speaking the adjusted basis is equal to the purchase price plus capital improvements less depreciation. Transactions involving exchanges, gifts, probates and receiving property from a trust can have an impact on calculating the property’s adjusted basis. The taxpayer’s C.P.A. or tax advisor is the party to look to for these types of questions.
Boot: Boot is any type of property received or given up in an exchange that does not meet the like kind requirement. Generally speaking, receiving boot will trigger the recognition of gain and taxes. If the Exchanger receives boot, they will be taxed. Boot added or given up by the Exchanger does not necessarily trigger a taxable event. In a real property exchange, boot received is any type of property received by the exchange which is not real property held for investment or productive use in a trade or business.
Cash Boot: Cash Boot consists of cash and nonqualifying property. A car, a boat or receipt of the beneficial interest in a promissory note are all examples of Cash Boot.
Mortgage Boot: Mortgage Boot consists of the secured debt given up and received as part of the same exchange. If the exchanger increases the amount of debt on the Replacement Property verses the Relinquished Property, they have given mortgage boot. If the exchanger decreases the amount of debt on the Replacement Property verses the Relinquished Property, they have received mortgage boot. Generally speaking, mortgage boot received triggers the recognition of gain and it is taxable, unless offset by Cash Boot added or given up in the exchange.
Constructive Receipt: Even if the Exchanger does not actually receive the proceeds from the disposition of the Relinquished Property, the exchange will be disallowed if the Exchanger is treated as having constructively received the funds.
Delayed Exchange: Also called non-simultaneous, deferred and Starker. A delayed exchange is a tax deferred exchange where the Replacement Property is Received after the transfer of the Relinquished Property. In a delayed exchange the Exchanger must identify all potential Replacement Properties within 45 days from the transfer of the Relinquished Property and the Exchanger must Receive all Replacement Properties within 180 days or the due date of the Exchanger’s tax return whichever occurs first.
Like-Kind Property: Refers to the nature of the property the Exchanger gives up or receives as part of the same tax deferred exchange transaction. In order to qualify as like kind the property given up or received must be held for productive use in a trade or business or held for investment to qualify as like-kind.
Realized Gain: Refers to a gain that is not necessarily taxed. In a successful exchange the gain is realized but not recognized and therefore not taxed.
Recognized Gain: Refers to gain which is subject to tax. When someone disposes of property at a gain or profit in a taxable transfer such as a sale, the gain is not only realized, but recognized and subject to tax.
Relinquished Property: The property given up by the exchange to start the 1031 exchange transaction. This property usually passes through an accommodator before transferring to the ultimate Buyer.
Reverse Exchange: An exchange where the Exchange acquires or gains control of the Replacement Property before disposing of the Relinquished Property.
Simultaneous Exchange: Also referred to as a concurrent exchange. A simultaneous exchange is an exchange transaction where the Exchanger transfers out of the Relinquished Property and Receives the Replacement Property at the same time.
Transfer Tax: A tax usually assessed by a city or county on the transfer of property. It may be based on equity or value. When structuring a multi-party exchange an exchange agreement will usually call for direct deeding to eliminate additional transfer tax.
A taxpayer must identify replacement property within 45 days after the transfer of the relinquished property, and acquire the replacement property within the earlier of 180 days of the relinquished property closing, or the due date of the taxpayer’s tax return.
This means that 1031 escrows that close after Oct. 18 will not have the full 180 days to acquire the replacement property unless the taxpayer files an extension.
Contact your CPA or tax attorney for advice.