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 a debt, just like all other debts, and needs to be considered very carefully
    • It takes patience and wisdom to buy a house
    • The best kind of home purchase is a 100%-down payment
    • Compounding interest works similarly here
      • A $225,000 house with a 6% loan after 10 years
        • With a 15-year mortgage ($1,899/month) will have $98,210 remaining
        • With a 30-year mortgage ($1,349/month) will have $188,292 remaining
        • The 15-year will have paid off about $125,000 more than the 30-year loan!
  • Buying is not intrinsically superior to renting
    • There is nothing wrong with renting, and is actually better for many lifestyle decisions
      • Temporary arrangements
      • Poor knowledge of the area
      • Uncertain work environment
    • Even though buying a house builds equity, it also has many necessary expenses to consider
      • Insurance
      • Property taxes
      • Utility costs
      • Necessary repairs and improvements
    • Though a house can be a worthwhile investment, you won’t receive any returns on the investment until you either are renting rooms or selling the house
    • However, renting should ultimately be a temporary decision
  • There are many bad times to buy a house
    • The housing market is very high
    • Your family has a one-year-old child or you’re a newlywed
    • You haven’t saved 3-6 months of expenses or are still in debt
    • You haven’t saved for a down payment
  • There are also many great reasons to buy a house
    • “Home” is an emotional word, and it’s more than a financial transaction
    • It’s a forced savings plan
    • It’s a hedge against inflation
    • It grows tax-free

The real estate industry in general

  • A realtor is a salesperson collecting commission on the most expensive consumer product ever
    • Research who you’re partnering up with to make a 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 not all homes 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 what started 2008 global market crash
      • Down payments are as low as 3% or lower and are used on lower-priced homes for first-time buyers
        • These loans are usually more expensive than conventional financing and should be avoided
    • VA loans are insured by the US Department of Veterans Affairs
      • Like with FHA loans, a good down payment on a conventional loan is less expensive
    • Owner Financing is where you pay the owner directly
      • This is a great idea because you can get creative in the structuring of the loan
      • Be very careful about getting taken advantage of
      • Be absolutely certain everything is signed in writing
    • If your credit score is low because you have little to no debt you need to have a manual underwriter, shop around if your bank doesn’t provide it
    • Ideally you need to be pre-approved for a mortgage, not just pre-qualified, before you begin shopping for a house
      • As tempting as it may be to buy as high as you’re qualified, 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 normally pay
    • Depending on the state, you can buy a house for a few dollars if you live in one for 5 years
    • Sometimes family or friends are selling a house they want to quickly get out from owing on
    • You can take an assumable loan on a house someone already owns, where you basically take over the remainder of the loan for someone and they hand you the deed to the house
    • A foreclosure of a house can be purchased from a bank for a reasonable cost

There are different types of home loan options

  • Fixed Rate vs Adjustable Rate (ARMs)
    • The concept of the ARM is the transfer the risk of higher interest rates to the borrower and in return the lender gives a lower rate now
    • ARMs are based on the assumption that the bank has your best interests at heart
    • Never get involved with these
    • If you do have an ARM, refinance immediately
  • Interest-Only Loans
    • Minimum monthly payment is on the home’s interest
    • This means you’ll never actually own the home, even if the rates are extremely low
    • For the risk you’re taking, just rent somewhere
    • Even worse than an interest-only loan is Negative Amortization Loans, where you pay less each month than the interest that compounds!
  • Reverse Mortgages
    • Converts the stored-up equity into cash
    • The fees on reverse mortgages are almost always unreasonable
    • It’s better to find other ways of financing your retirement
      • Make lifestyle changes
      • Sell the home
      • Look for government assistance
      • Rent out one of your house’s rooms
  • Accelerated/Bi-Weekly Payoff Programs
    • Requires you to pay it off faster
    • Instead of using a program to pay off the loan, just make more principal payment every month
  • Private Mortgage Insurance (PMI) is for the lender, not for you
  • In comparison to a higher down payment, the tax advantages of a home mortgage are almost never worth the costs of getting the mortgage, both financially and psychologically
    • Generally speaking, the best home loan is a fixed rate 15-year mortgage with a rate that is up to 25% of your take-home pay that has at least a 10% down payment
    • It is very common for people to fall in love with a house they cannot afford

When you’re hunting around

  • Have your needs and wants clarified before you even start looking at a house
  • The 3 C’s of home buying: Cautious, Careful, Coherent
  • Consider moving to a place where the cost of living is cheaper
    • Think about a smaller home as well
  • Buy in the bottom price range of your neighborhood and preferred region
    • Look for abandoned or run-down houses if you feel your skills are up to the challenge
  • Though buying a home is an emotional experience, be ready to do your due diligence and walk away if things start looking bad
    • If you’re buying more than a standard subdivision lot, always get a land survey
    • Have a certified home inspector mechanically and structurally inspect the house
    • An appraisal is just a professional opinion of value, but it’s still worth getting
    • Title insurance is for when your property ownership is questioned, and is a definite must-buy
  • Pay attention to important details
    • Can be or is attractive from the street
      • Look at the surrounding neighborhood and how old the houses are
      • Look if there are kids playing outside
      • Pay attention to any signs of construction, since new shopping areas and expanding neighborhoods are a sign of a healthy community
    • Has a good basic 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
    • Structural problems
      • Nearly every home inspection is sure to find something, even on new homes
      • Be ready to incorporate the non-selling related cost into your estimations for buying
        • 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
      • Be ready to walk away from major problems
        • Foundation failures or noticeable structural problems
        • Prior sinkholes
        • Irreparable water damage
        • Termites or other insect infestations
        • Polybutylene piping
        • Asbestos
  • Overlook easy fixes
    • Bad landscaping
    • Ugly carpet
    • Outdated wallpaper or peeling paint
    • Bad interior decoration or holes in the drywall
  • The 3 rules of real estate: Location, Location, Location
    • Buy near water if possible
    • Try to buy near a good view
    • Be aware of the noise pollution level of the site, such as freeways or industrial areas
  • When the appraisal shows the house isn’t worth what you’re paying
    • 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 your realtor what to do

After you’ve bought the house

  • Never over-build your home with additions and improvements in comparison to your neighborhood
  • Keep up on the paint, since it weatherproofs the house as well as insulates it
  • Any additions to the home that you make now will not just make it more enjoyable, it will many times make it easier to sell later
  • Overpay the mortgage whenever you can to cut down the term of the loan
  • Try to learn how to perform most of your repairs, most of the jobs are just busywork once you watch a video
    • If you have to get a contractor, use a service like Angie’s List to find a worthwhile one
      • Generally it’s a better idea to buy your own supplies and parts and charge them solely for the service
      • Sometimes your HVAC or electrical service provider will offer an extended maintenance agreement
        • Though this is a good idea if your items are likely to break down, it might not be worth it

When you want to sell your house

  • You should consider 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 (upside down loan)
        • A short sale is when you sell the house for less than it is worth and the total amount it’s sold for is considered full payment for the loan
      • If you choose to walk away from your mortgage without paying, even with money to make the payments, is called strategic default
        • Strategic default is a purely unethical decision
    • 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
      • You have new work opportunities that will take you inconveniently far away
      • Your child would benefit by going to a nicer school district
      • The house is worth more than you owe on it
  • Think like a retailer when you want to sell
    1. Shop around for a realtor immediately, since the exposure through the Multiple Listing Service (MLS) is worth it
      • A great real estate agent is worth more than they’ll cost, unless you yourself are experienced in selling
        • They can expose you to many more potential buyer through the MLS
        • A good real estate agent sells more houses in a week than you will in your life
        • A 6% commission with a 10% increase in the sale price is worth the investment
      • Interview at least 3 agents when deciding who to sell your home
        • Do not rely on friends or family to sell
        • The right real estate agent
          • Should have 4+ years of experience
          • Should be selling 35+ homes each year
          • Should have an average list-to-sale ratio of over 100%, which means they consistently get above asking price on each sell
          • Should have an average time to sell that is comparable to the standard rate for your area
          • Should know the area, but it isn’t a deal-breaker if the realtor is good enough
          • Will outline what marketing will work, how, and why they won’t use something that 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 that you can contact
        • Be wary of a long listing contract that you can’t get out of but they can
        • Some agents will charge marketing fees
        • Pay attention to their communication skills
          • Returns calls promptly, ideally within a day
          • Effective in getting to the point quickly
          • Polite in dealing with others
          • Patient in explaining the processes they work with
          • Has a strong grasp of the data and information they are working with
    2.  Before you consider listing it, get an accurate value of the home
      • Pay attention to 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
        • Try to 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 include the costs of the new home you want into calculating how much you want to sell your current home
        • 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)
        • Compares homes near you that are either on the market or have been sold in the past few months
        • The purpose of the analysis is to find homes similar to yours in terms of 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, which can be 6-10% of your home’s value
      • When you list it on the internet, be absolutely certain that you have an appropriate price or nobody will consider it
      • Have the cash flow to take care of the expenses before you come to them
        • Repair and improvement costs
        • Moving costs
        • Potential closing costs
        • New home costs
    3. As soon as you want to sell, clean up the house to have it ready to be appraised
      • Decide what you can live without before until the house sells and put it away
        • Be ready to live life slightly inconvenienced for a few months
    4. At least a month before listing, tackle repairs to be done
      • The return on investment for minor fix-ups and repairs is enormous
        • Ask your agent where the money will matter in the sale
          • The most significant repairs should be to ensure electrical, plumbing, HVAC and the roof are all in good condition
          • The most significant cosmetic improvements should be in the living room, kitchen/dining area and master suite
        • A correctly staged house will sell almost twice as fast
      • Hire a home inspector to identify issues before they risk ruining the deal in escrow
        • A home inspection includes a report with everything related to the function of the house, and the price for it is always worth it
          • Electrical, plumbing and HVAC systems
          • Walls, ceilings, floors, windows and doors
          • Roof, attic and visible insulation
          • Foundation, basement and structural components
      • Paint the house
        • One of the most cost-effective ways to increase house value
        • Main entryways need to look good
        • Have a matching tone throughout the house
        • Pay attention to painting the outside of the house that faces the street like the trim and stucco (curb appeal)
        • 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
        • Usually the most profitable, dollar-for-dollar
        • Consider granite or marble counter tops, or at least replacing them
        • Look at putting new hardware on the cabinets, or going further with new doors and veneer
        • If you can, try to make it match the bathrooms
        • Replace the sink with a more modern one
        • Put in new appliances
      • Improve the bathroom
        • Put new hardware on the cabinets
        • Update the faucets to make it look more modern
        • 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 it more inviting outside
        • The most important aspect of preparation is curb appeal (how it looks from the street)
        • Spruce up 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
        • 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
        • Make an extra closet
          • This can be done with bookshelves and tension rods
        • Add a laundry space if it’s an older house
      • Build “accessories” for the house
        • A built-in bookcase into a wall
        • Install an upholstered bench into a stair landing
    5. A few weeks from listing, create an inviting space to enable buyers to see the house as their own home
      • Place nice patio furniture out
      • Replace all of the lights with brighter ones
      • Rearrange the furniture and remove any items not being used on a regular basis, which may include moving to a storage unit
        • Living Room
          • Arrange the furniture with conversation and not TV-watching in mind, borrow from other rooms if you need
          • 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, scrub every surface to a shine and clean everything to make every room look as big and high-class as possible
      • Make every window, door, surface, closet and cabinet free of debris or clutter
      • Have a professional photographer take photographs that show the house in the best possible light
        • Without a sharp set of photographs, many potential buyers won’t even show up
        • The realtor should have a good photographer they know
        • Add small details around the house to make it extra appealing
          • 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 of the 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
        • If it makes sense, have a professional videographer make a presentation of the house as well
    7. When the potential buyers arrive, make it feel like it can be their home
      • Make it look as reasonably close as possible to the photographs
      • Bake something that smells good before the buyers come
      • Burn scented candles
      • Strike a balance between “for sale” and “inhabited”
        • Put things away as soon as you’re done with them
        • Have a small to-do list for when anyone is coming by
        • Have pets live elsewhere for a bit
        • If you have kids, keep them in line and motivate them to help out as well
    8. Even with the modifications, be ready for potential buyers to explain how the home is not perfect and get ready for the negotiations process
      1. Initial offer
        • It is best to find a buyer that has been pre-approved for a mortgage, since the deal may fall through if not
        • Be prepared for hard-hitting negotiations on the value of the home
          • Offering a home warranty will not typically make the sale, but consider it if the buyer wants it
        • The contract stage works differently in every state, so be sure your realtor knows how it works
        • Be sure you are fully aware about what you are signing the paperwork for, pay especially close attention to
          • 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 such as the sale of the buyer’s home
        • Look at the entire dollar amount being spent after everything
        • A low offer is still an opportunity to get your house sold, so don’t take it personally
      2. Home inspection
        • Many times the buyer will want an inspection even after you got one
        • It is not uncommon for the other inspector to find issues that yours didn’t
        • To cover the cost of repairs, you can either offer cash at closing or a discount on the sales price
          • Sometimes though, 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 a fix is required, it is usually better to hire a contractor that the realtor knows instead of risking the buyer requesting a re-repair
        • If a title search uncovers an open lien on the property, you will either have to pay for it or your title insurance will cover it
      3. Appraisal
        • Make a detailed list of improvements to the home and have any invoices or receipts available to prove it
        • Have your real estate agent provide well-researched comparables to support your sales price
        • On appraisal day have the home in pristine condition so the appraiser knows the house is maintained
        • If the appraisal is lower than your selling price you have several options
          • Your agent can dispute a questionable appraisal
          • Drop your contract price
          • The buyer can bring the difference in cash
          • You and the buyer meet somewhere in between
          • The deal is off
      4. Loan commitment
        • At this point, your realtor should proactively be
          • Contacting the buyer’s lender to push the approval process forward in time
          • Investigating anything that could risk putting the deal in danger
          • Connecting the buyer with an alternate lender if the first one falls through
        • Consider the deal off if the buyer cannot secure financing for any reason whatsoever

Once the house has been sold, move as soon as you can

  • Be sure that escrow closes on the house before you actually start moving
    • Bring photo ID and the keys on closing day
    • Expect the best but be prepared for the worst
  • Keep the buyer informed about when you’re moving and what stays
  • Use my Moving Checklist to walk yourself through it
  • Keep your end of the bargain and leave on a positive note with buyer
Next: Money 307: Big Decisions – Holidays