Money 306: Big Decisions – Home Ownership

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Money 305: Big Decisions – New Baby

Buying a home is a privilege, not a right

A home equity loan is the same as all other debts

It takes wisdom and patience to get a good home, so consider the decision carefully

Compounding interest on a home loan works similarly to all other debts

  • Consider a 6% loan on a $225,000 house after ten years
  • A 15-year mortgage ($1,899/month) will have $98,210 remaining
  • A 30-year mortgage ($1,349/month) will have $188,292 remaining
  • The 15-year loan will have paid off about $125,000 more than the 30-year loan

The best kind of home purchase is a 100%-down payment

Buying is not intrinsically superior to renting

Until you can sell your house, you’re stuck in the region

Renting is better for many lifestyle decisions

  • Temporary arrangements
  • Poor knowledge of the area
  • Uncertain work arrangement

Though buying a house puts monthly “rent” into equity, it also incurs necessary expenses

  • Insurance
  • Property taxes
  • Utility costs
  • Necessary repairs and improvements

A house can be a worthwhile investment, but you won’t receive any returns until you either rent rooms or sell the house

Renting should be a temporary decision if you intend to stay in an area for a long time

Don’t buy a house when the timing isn’t right

The housing market shouldn’t be high

Don’t buy a house if your family is still only a few years starting off, even with a child

  • A two-bedroom apartment is entirely sufficient for two children

Save 3-6 months of expenses and get out of debt

Have a down payment saved

There are many great reasons to buy a house

“Home” is an emotional word and is more than a financial transaction

A house is a forced savings plan

Houses hedge against inflation

House equity grows tax-free

Learn about the real estate industry in general

A realtor is a salesperson collecting a commission on the most expensive consumer product ever

Research your choice of partner for your purchase

Realtors have access to the MLS (Multiple Listing Service) which provides a listing of most homes for sale

  • 90% of buyers start on the internet, so homes don’t need to run through the MLS anymore

There are multiple ways to finance a home loan

Federal Housing Authority (FHA) loans are through Freddie Mac & Fannie Mae

  • Issued by HUD (Housing & Urban Development), a government organization
  • They are usually privately insured against default
  • They were a large part of the 2008 global market crash
  • FHA loans are often for lower-priced homes with first-time buyers
  • Down payments can be as low as 3% or lower
  • Avoid FHA loans if possible, since they are usually more expensive than conventional financing

The US Department of Veterans Affairs insures VA loans instead of HUD

  • VA loans are similar to FHA loans, and a sizeable down payment on a conventional loan is less expensive

Owner financing allows you to pay the owner directly

  • Owner financing allows you to be creative when structuring the loan
  • Be very careful about getting taken advantage of
  • Be entirely sure everything you discussed is signed in writing

You will need a manual underwriter if your credit score is low from little to no debt

  • Shop around if your bank doesn’t provide it

Ideally, you should be pre-approved for a mortgage before you start shopping for a house, not just pre-qualified

  • It’s tempting to buy as high as you’re qualified, but keep your budget and long-term goals in mind
  • A 1% increase in a home loan will likely be about an additional $100 per month and about $50,000 across the life of the loan

Sometimes, you can come into a house for a fraction of what you’d typically pay

  • Depending on the state, you can buy a house for a few dollars if you live in one for five years
    • Some states give free properties if you live on them for a specified period or build a house on it
  • Family or friends may want to sell and leave a house quickly
  • Banks will sell foreclosed homes for a reasonable price
  • You can take an assumable loan from anyone, even when they’re not on the market
    • You claim the remainder of the loan in exchange for them giving you the deed to the house

There are different home loan options

Fixed Rate vs. Adjustable Rate (ARMs)

The ARM is meant to transfer the risk of higher interest rates to the borrower in return for the lender giving a lower interest rate now

  • ARMs assume the bank has your best interests at heart
  • Never get involved with these
  • Immediately refinance if you have an ARM

Interest-Only Loans

The minimum monthly payment only pays the house’s interest

  • You’ll never own the house, even with low rates
  • Rent somewhere to avoid the risk from the loan unless you’re buying with the purpose of flipping it quickly

Negative Amortization Loans are worse, with monthly payments less than the compounding interest

Reverse Mortgages

Converts the stored-up equity into cash

The fees on reverse mortgages make the arrangement unreasonable

Find other ways to finance your retirement

  • Make lifestyle changes
  • Sell the home
  • Look for government assistance
  • Rent out one of your rooms

Accelerated/Bi-Weekly Payoff Programs

Requires you to pay the mortgage off faster

Give a more substantial principal payment every month instead of getting forced into more payments

Other options

Private Mortgage Insurance (PMI) isn’t for you; it’s for the lender

Compared to a higher down payment, the tax advantages of a home mortgage are almost never worth the costs of the mortgage

  • On top of costing financially, it provides more psychological stress

Shoot for an “ideal” home loan

  1. Fixed rate
  2. 15-year term
  3. A rate up to 25% of your take-home pay
  4. At least a 10% down payment

Hunt for homes carefully

It is very common for people to fall in love with a house they can’t afford

  • Clarify your needs and wants before you even start looking at a house

The 3 C’s of home buying: Cautious, Careful, Coherent

Buy in the bottom price range of the neighborhood and preferred region

Look for abandoned or run-down houses if you feel your skills are up to the challenge

Consider moving to a place with a lower cost of living

Think about a smaller house or one you can build onto

Do your due diligence and walk away if things start looking bad

Walking away can be difficult due to the emotional nature of home-buying

Always get a land survey if you’re not buying a standard subdivision lot

An appraisal is only a professional opinion of value but is still worth getting

Get a certified home inspector to mechanically and structurally inspect the house

Always buy title insurance, which covers when anyone questions your property ownership

Learn to observe the right details when walking into the house

The house should be or can be attractive from the street

  • Look at the surrounding neighborhood and how old the houses are
  • Look if kids are playing outside
  • New shopping areas and expanding neighborhoods are a sign of a healthy community, so look for any signs of nearby construction

Look at the house’s floor plan

  • Kitchen
    • Accessible and connected to the rest of the rooms, as it’s the “hub” of any house
    • Has a convenient eating area to accommodate many people
    • Has a kitchen island to permit easier food preparation
  • Bedrooms
    • Walk-in closets and en-suite bathrooms
  • Outside
    • Wraparound porches and open spaces to relax and play
    • A swimming pool, if you’re willing to do the required maintenance on it

Pay attention to any structural problems

Even in new homes, nearly every home inspection should find something

Overlook the easy fixes

  • Bad landscaping
  • Ugly carpet
  • Outdated wallpaper or peeling paint
  • Bad interior decoration or holes in the drywall

Incorporate the non-selling related costs into your buying estimation

  • Outdated electrical wiring
  • Plumbing problems
  • Foundation damage like cracks or foundation walls that bulge or are bowing
  • Septic tank failure
  • Water intrusion from leaks
  • Mold

Walk away from major problems

  • Foundation failures or noticeable structural problems
  • Prior sinkholes
  • Irreparable water damage
  • Termites or other insect infestations
  • Polybutylene piping
  • Asbestos

The three rules of real estate: Location, Location, Location

Buy near water if possible

Try to buy near a good view

Be aware of noise pollution from things like freeways or industrial areas

Think about your preferences when choosing a house

  • Check the cell phone signal inside the house to confirm that you have convenient service
  • If you’re afraid of the house flooding, get a house at the top of a hill
  • If you’re concerned about getting robbed, get a house close to a police station
  • If you want your home to power back on quickly after a power outage, get a house near a hospital
  • If you’d like the snow plow to clear your house first, find one near a school
  • If you want rapid pizza delivery or convenient access to fast food, get a house close to a pizza place or restaurants

If the appraisal shows the house isn’t the amount they’re selling it for

Ask the seller to lower their asking price, which is the least likely to work

Challenge the appraisal or request a new one if it contains incorrect information

Cancel the contract

Meet in the middle of the values with cash out-of-pocket, keeping in mind your costs

Ask a realtor what to do

After you’ve bought the house

Never over-build your home with additions and improvements compared to the rest of the neighborhood

Keep up on the paint, since it both weatherproofs and insulates the house

Any home additions you make now will make it more enjoyable, but will many times make it easier to sell later

Overpay the mortgage whenever you can to cut down the cost of the loan

Learn how to perform most of your repairs

  • Most of the jobs are just busywork once you watch a video
  • Learn the subtler points of maintaining a home (more on this much later)

If you must hire a contractor, find a worthwhile one with a service like Angie’s List

  • It’s generally a better idea to charge them for the service after buying supplies and parts yourself
  • Sometimes your HVAC or electrical service provider will offer an extended maintenance agreement
    • Extended agreements are only a good idea if your items are likely to break down, and they’re often not worth it

You should think about selling if any of the following apply

You’ve inherited or purchased a home that you either cannot or can no longer afford

If the housing market changes, you may owe more on your house than the house is worth (an upside-down loan)

  • A short sale sells the house for less than it’s worth and its sale price is considered a full loan payment

Walking away from a mortgage without paying, even with money to make the payments, is called a strategic default

  • Strategic default is completely unethical

The home does not bring joy or satisfaction to your life or doesn’t fit your lifestyle anymore

Your family has grown too big for your house

The house has become too much trouble to maintain

The house is too big now that the kids have moved out

Other opportunities to make money or save money make the home cost-ineffective

New work opportunities will take you inconveniently far away

Your child would benefit from a better school district

The house is worth more than you owe on it

When you want to sell, think like a retailer

1. Shop around for a realtor immediately

Unless you have sufficient sales experience, a great real estate agent is worth more than they’ll cost

  • They can expose you to many more potential buyers through the MLS
  • A good real estate agent sells more houses in a week than you will in your life
  • A 6% commission for a 10% increase in the sale price is worth the investment

A great real estate agent has particular qualities

  • Has 4+ years of experience
  • Sells 35+ homes each year
  • Has an average list-to-sale ratio of over 100%, which means they consistently get above asking price on each sell
  • Has an average time to sell similar to the standard rate for your area
  • Knows the area (not a deal-breaker if the realtor is good enough)
  • Outlines what marketing will work, how, and why they won’t use something you bring up for the market they’re appealing to
  • Will tell you what you need to hear
  • Will step up their effort when issues come up
  • They should have a long history of satisfied customers you can contact for reference

Look at their communication skills

  • Returns phone calls promptly, ideally within a day
  • Effectively communicates points quickly
  • Polite with others
  • Patiently explains the processes they work with
  • Has a firm grasp of the data and information they work with

Interview at least three agents when deciding

  • Do not rely on friends or family to sell
  • Be wary of an elaborate listing contract where they can leave it but you can’t
  • Some agents do charge marketing fees

2. Before you list it, get an accurate value of the home

Look at the market

  • Are homes in your neighborhood selling quickly?
  • Have home values in your area shown consistent growth?
  • Does your estimated home value trend upward or downward?
  • How does your home value compare to the rest of your city?
  • Expand your search to look for nearby current listings, recently sold homes and foreclosures
  • Sell in the winter to get it sold faster

Don’t try to figure out the value of your home by yourself, since you’re not a professional who deals in home values

  • Emotional Equity: the difference between what a house is worth and what it feels like it’s worth to the owner
  • Do not include your sentiments and personal feelings into providing a reasonable value
  • Don’t add your new desired home’s costs into how much you want to sell your current home for

Don’t try to test the market by putting the price of the house above market value

  • You’ll have the house on the market a lot longer than you’ll be comfortable with
  • If you under-price the house, you may even get potential buyers into a bidding war

Have a realtor do a free Comparative Market Analysis (CMA)

  • A CMA compares nearby homes currently on the market and previously sold within the past few months
  • The purpose is to find similar homes to yours regarding size, bedrooms, exterior, interior, and location

Analyze how much profit you’ll make before you commit to selling

  1. Take the market value from the CMA and subtract the balance left on your mortgage
  2. Take away closing costs off of that amount, which can be 6-10% of your home’s value
  3. Take away an approximated cost of moving to another place, along with storage fees

When you list it on the internet be entirely confident you’re setting an appropriate price or nobody will consider it

Have cash flow to take care of expenses before they come

  • Repair and improvement costs
  • Moving costs
  • Potential closing costs
  • New home costs

3. As soon as you want to sell, clean up the house for its appraisal

Store away anything you can live without until the house sells

Get prepared to be slightly inconvenienced in your home for a few months

4. At least a month before listing, tackle all necessary repairs

The investment return on minor fix-ups and repairs is enormous

A correctly staged house will sell almost twice as fast

Ask your agent where the money will matter in the sale

  • The most significant repairs should ensure electrical, plumbing, HVAC, and the roof are all in excellent condition
  • The most significant cosmetic improvements should be in the living room, kitchen, dining area, and master suite

Hire a home inspector to identify issues before they risk ruining the deal during escrow

  • A home inspection includes a report with everything related to the function of the house, and it’s always worth the price
    • Electrical, plumbing and HVAC systems
    • Walls, ceilings, floors, windows, and doors
    • Roof, attic and visible insulation
    • Foundation, basement and structural components

Paint the house

  • Painting is one of the most cost-effective ways to increase house value
  • Make the main entryways look good
  • Make a matching tone throughout the house
  • Pay particular attention to the curb appeal (the outside of the home that faces the street), especially the trim and stucco
  • Paint all cabinets and walls

Replace or upgrade all across the house

  • Update the flooring, especially the carpets, or hire a professional to deep-clean the rugs
  • Improve, install or update the light fixtures, especially over the dining room
  • Create a batten wall or add baseboards

Improve the kitchen

  • Kitchen repairs are usually the most profitable
  • Consider granite or marble countertops or at least replacing the current counters
  • Put new hardware on the cabinets, or get new doors and veneer
  • If you can, make the kitchen match the bathrooms
  • Replace the sink with a modern one
  • Put in new appliances

Improve the bathroom

  • Put new hardware on the cabinets
  • Update to modern faucets
  • If you can, try to make it match the kitchen and other bathrooms
  • Replace the towel racks and other accessories like the shower curtain

Make the outside more inviting

  • The most important aspect of preparation is curb appeal (how it looks from the street)
  • Improve the landscaping
    • Prune bushes, trim trees, add color with flowers
    • Add fresh mulch or wood chippings, put a giant pot of flowers by the front door
    • Pull any weeds, water the plants
    • Install drought-tolerant plants if you’re in a drier climate
  • Add to the outside
    • Replace the entry door
    • Repair or replace the garage door
    • Create crown molding
    • Add a corrugated steel privacy fence

Update the laundry space

Add legal living space

  • Add an extra room
  • If it’s an older house, add a laundry space
  • Look for dead space in between rooms
    • Make an extra closet with bookshelves and tension rods

Build “accessories” for the house

  • Build a bookcase into a wall
  • Install an upholstered bench into a stair landing

5. A few weeks from listing, make an inviting space for buyers to see the house as their home

Place nice patio furniture out

Replace all the lights with brighter ones

Rearrange the furniture and remove any items not routinely used

  • Move anything you can to a storage unit

Living room

  • Arrange the furniture with conversation and not TV-watching in mind
  • Replace, remove or put a slipcover over worn-out furniture

Bedrooms

  • Store any bulky furniture
  • Put on new bedding and throw pillows

Bathrooms

  • Straighten up the linen closet

If the home is vacant

  • Lightly stage the important rooms
  • Have lawn and cleaning services take care of the house while you’re away

6. A week before listing, clean everything pristinely

Scrub every surface to a shine

Clean everything to make every room look as big and high-end as possible

Clear every window, door, surface, closet, and cabinet of debris or clutter

Hire a professional photographer to take photographs that show the house in the best possible light

  • Many potential buyers don’t look twice without a set of good photos
  • The realtor should have a good photographer they know
  • If it makes sense for the image you want, also hire a professional videographer for a more pronounced presentation

Make the house more appealing with small details everywhere

  • Open up all the windows and drapes to let in light
  • Living room
    • Put new throw pillows on the sofa
    • Add a vase of flowers on the coffee table
    • Don’t scatter rugs around any rooms, since they don’t photograph well
  •  Kitchen
    • Set the dining table with the best dishes, flatware, and linens
    • Keep the counters sparse and spacious
    • Have a few trendy-looking stainless steel appliances out
  • Bathroom
    • Close the toilet lid
    • Hide the laundry hamper and any personal towels
    • Put clean ornamental towels on the towel racks

7. When the potential buyers arrive, make it feel like it could be their home

Make the house look as reasonably close as possible to the photographs

Bake something that smells pleasant before the buyers come

Burn scented candles

Strike a balance between “for sale” and “inhabited”

  • Put things away as soon as you’re finished with them
  • Have a small to-do list for when anyone is coming by
  • Have your pets live elsewhere until escrow opens
  • Keep your children out of trouble and motivate them to help out as well

8. Even with the preparation, get ready for potential buyers to explain problems with the home and the negotiation process

  1. They will give an initial offer
  • A buyer pre-approved for a mortgage is best, since the deal may fall through without it
  • Be prepared for hard-hitting negotiations on the value of the home
    • Offering a home warranty will not typically close the sale, but think about it if the buyer wants it
  • Each state has a different type of contract stage, so make sure your realtor knows how it works
  • Stay fully aware of the papers you sign, especially
    • Purchase price
    • Closing or escrow date
    • Special allowances for personal property, home improvements, and closing costs
    • Contingency deadlines for the home
    • Inspection, appraisal and buyer financing
    • Additional contingencies like the sale of the buyer’s home
  • Look at the entire dollar amount spent after everything
  • A low offer is still an opportunity to get your house sold, so don’t take it personally
  1. Home inspection
  • Many times the buyer will want an inspection independent of the ones you’ve purchased
  • It’s not uncommon for the other inspector to find issues yours hadn’t found
  • To cover the cost of repairs, either offer cash at closing or a discount on the sales price
    • Sometimes, depending on the buyer’s loan, the appraiser may require certain repairs to be performed
    • Have your realtor negotiate with the buyer to see if you can meet the buyer in the middle
    • If you’re expected to have it fixed, it’s usually better to hire a contractor the realtor knows instead of risking the buyer requesting a re-repair
  • If a title search uncovers an open lien on the property, you must either pay for it or use your title insurance
  1. Appraisal
  • Make a detailed list of improvements to the home and prove it with invoices or receipts
  • Have your real estate agent provide well-researched comparables to support your sales price
  • On appraisal day, keep the house in pristine condition
  • If the appraisal is lower than your selling price you have several options
    1. Your agent can dispute a questionable assessment
    2. Drop your contract price
    3. The buyer can bring the difference in cash
    4. You and the buyer meet somewhere in between
    5. Leave the deal
  1. Loan commitment
  • At this point, your realtor should be proactive
    1. Contacting the buyer’s lender to push the approval process forward
    2. Investigating anything that could risk endangering the deal
    3. Connecting the buyer with an alternate lender if the first one pulls out of the deal
  • If the buyer cannot secure financing for any reason whatsoever, leave the deal

Once you’ve sold your house, move as soon as you can

On closing day, bring a photo ID and the house keys

Make sure escrow closes on the house before you start moving

  • Expect the best but be prepared for the worst

Keep the buyer informed about when you’re moving and what stays with the house

Walk yourself through it with a moving checklist (one provided much later)

Keep your end of the agreement and leave on a positive note with the buyer

Next: Money 307: Big Decisions – Holidays