How to Buy or Refinance a Home

What mistakes are commonly made when buying or refinancing a home?
Should I refinance?
Should I pay points? Does a zero point loan with no fees really exist?
What is a FICO score?
Why do interest rates change?
What is the difference between being pre-qualifed and pre-approved?
What is a rate lock?
Can my loan be sold? What happens if my lender goes out of business?
What is Private Mortgage Insurance (PMI)?
What is an Annual Percentage Rate (APR)?

Step-by-Step Home Buying

Don't Buy a Car - or Did You Already?
Things Not To Do Before Buying a Home
Reasons to Delay Buying a Home
Are you Buying a House? Or a Home?
Why Buying a Home is a Good Idea
The Business Cycle and Buying a Home
Why Search for A Realtor?
Looking Ahead - Buyer's Remorse
Comparable Sales and Your Offer Price
Factors Affecting Your Offer Price
Offering to Purchase Real Estate- the Basics
Writing Offers - Property Safeguards
How Financing Affects Your Offer
How FHA and VA Affects Your Offer
Agreeing with the Seller on Some Services
Buying a Home for Resale Value - Location
Buying a Home for Resale Value - the House
Did You Make a Huge Mistake?


Buying Hints & Insights

When Your Home's Value is Less Than the Mortgage
Should You Buy a Home in Today's Market?
The Home "Wealth" Effect
Closing at the End of the Month.
What is the Multiple Listing Service?
How the Lockbox Helps Buyers and Sellers
Location, Location, Location - Means...what?
When Market Value Outpaces Appraised Value
What Goes With the Home When You Sell or Buy?
Negotiating Contingencies in Real Estate Contracts
If you bought cars the way you bought houses
Asking the Seller to Pay Your Closing Costs
Where is an Agent's "True Value"..?
The Earnest Money Deposit


Submitted by Professionals

Purpose of a Real Estate Appraisal(New)
FAQs about Real Estate Appraiser Licensing and Certification(New)
Real Estate Lament
A Broker's Responsibility
Buying Homes in California
How do I Prepare for Closing?
Buying Bank Owned Properties
Buying Your Country Dream Home
Negotiating the Real Estate Contract
Choose Agent Carefully Before Buying Home
Buyer's Brokerage -- Boon or Bane?
So You Want to Buy a Home?
Your Escrow and YOU



Why You Should Not Buy a Car

When you get a raise or accumulate some savings, you may find yourself confronted by an innate instinct of modern civilized men and women.

The desire to spend money.

It begins simply, by going out to restaurants, then accelerates to purchasing clothing, electronic gadgets, and since North Americans have a special fondness for the automobile, you may even buy a "brand new car."

If you're married or ambitious, a few months later your thoughts eventually turn toward buying your own home. Or a move-up home, if you are already a homeowner.

Next, you contact a loan officer to get prequalified for a mortgage loan. You state your desired price and how much you can put down. You provide your income and may even supply pay stubs and W2 forms. The loan officer methodically crunches the numbers (by telephone, in person, or even over the internet).

"If only you didn't have this car payment..."

No Major Purchase of Any Kind

Review the article titled, "Don’t Buy a Car," and apply it to any major purchase that would create debt of any kind. This includes furniture, appliances, electronic equipment, jewelry, vacations, expensive weddings…

…and automobiles, of course.

Don’t Move Money Around

When a lender reviews your loan package for approval, one of the things they are concerned about is the source of funds for your down payment and closing costs. Most likely, you will be asked to provide statements for the last two or three months on any of your liquid assets. This includes checking accounts, savings accounts, money market funds, certificates of deposit, stock statements, mutual funds, and even your company 401K and retirement accounts.

If you have been moving money between accounts during that time, there may be large deposits and withdrawals in some of them.

The mortgage underwriter (the person who actually approves your loan) will probably require a complete paper trail of all the withdrawals and deposits. You may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious.

Perhaps you become exasperated at your lender, but they are only doing their job correctly. To ensure quality control and eliminate potential fraud, it is a requirement on most loans to completely document the source of all funds. Moving your money around, even if you are consolidating your funds to make it "easier," could make it more difficult for the lender to properly document.

So leave your money where it is until you talk to a loan officer.

Oh…don’t change banks, either.

Assuming you have the financial resources and the desire to eventually own your own home, there are very few good reasons to put off the purchase. You can miss out on years of appreciation if you do.

The main thing you want to avoid when buying a home is being put in a position where you will have to sell it too soon. If you have to sell a home before it has appreciated enough to cover the costs and commissions of selling, you could find yourself in a financial bind. This is especially true for those who buy a home with a down payment of ten percent or less.

Real Estate commissions traditionally run around six percent of a home’s sales price. The seller’s closing costs generally come to about one and a half percent. You can see how this can easily exceed the first year’s appreciation. If you made a minimal down payment, you could actually have to come up with cash out of pocket to sell your home.

New to the Area

A very good to reason to delay buying a home is if you have just moved to an unfamiliar area or region of the country. It makes sense to rent for a number of months before deciding on exactly where you want to live. Often when people buy a home immediately they find that they might have made a better decision if they had waited awhile.

Uncertain Job Future

You could be right out of college or expecting a promotion and a transfer. Or your company has announced an impending "restructuring." If any of these apply, it might be best to wait to buy a home. When you have a more accurate picture of what your next few years will be like, that will be the time to buy.

Marital Problems

Real estate agents see a lot of life unfold before their eyes. One of the saddest occurs when former clients divorce and are forced to sell a recently purchased house. It happens all too often when a family in turmoil decides that buying a new home may help resolve their problems. Perhaps it is inevitable that such problems occur, but selling a home before it appreciates can create an additional financial burden in an already difficult situation.

As you read and study about buying real estate, you will often find the words "house" and "home" used interchangeably. There is a huge difference between a house and a home.

A house can be a place to eat, sleep, park your car, and put all your "stuff" (including other family members). It is a material possession and an investment. A home is where you feel comfortable, warm, safe, and protected.

A home is where you live.

A house is something you buy logically. A home is an emotional purchase. When buying real estate you have to balance your emotional wants and your logical needs because there will almost certainly be a time when the two conflict.

Example

For example, you may want a house with a view, but the payment is higher than you feel comfortable with on a thirty-year fixed rate mortgage.

What do you do?

Purchase the house anyway and budget more carefully for the next few years? Buy the same house without the view and get it cheaper? Make a larger down payment by borrowing from your 401K or family members, so you get a lower payment? Get an adjustable rate mortgage with a smaller payment instead of a fixed rate loan? Or buy a smaller house and still get the view?

When viewing the house, most people look at it emotionally and envision it as a safe, happy, comfortable home. Later, when making the offer or filling out a mortgage application, your logic may begin to kick in, instead. That's when "buyer's remorse" may come up, but...that's a different article.

Balancing Act

The trick in buying real estate is to view all decisions with both a logical perspective and an emotional perspective. If a situation presents itself that requires a trade-off, decide on whether there is a huge conflict or a small one. Logic should win the big conflicts, but emotion should always be a factor, even winning the small ones.

You will find yourself owning a warm, happy, safe home – and an investment for the future at a price you are willing to pay.

As a fairly general rule, homes appreciate about four or five percent a year. Some years will be more, some less. The figure will vary from neighborhood to neighborhood, and region to region.

Five percent may not seem like that much at first. Stocks (at times) appreciate much more, and you could easily earn over the same return with a very safe investment in treasury bills or bonds.

But take a second look…

Presumably, if you bought a $200,000 house, you did not pay cash for the home. You got a mortgage, too. Suppose you put as much as twenty percent down – that would be an investment of $40,000.

At an appreciation rate of 5% annually, a $200,000 home would increase in value $10,000 during the first year. That means you earned $10,000 with an investment of $40,000. Your annual "return on investment" would be a whopping twenty-five percent.

Of course, you are making mortgage payments and paying property taxes, along with a couple of other costs. However, since the interest on your mortgage and your property taxes are both tax deductible, the government is essentially subsidizing your home purchase.

Your rate of return when buying a home is higher than most any other investment you could make.

There are times when the economy is brisk and everyone feels confident about his or her prospects for the future. As a result, they spend money. People eat out more, buy new cars, and…

…They buy houses.

Then, for one reason or another, the economy slows down. Companies lay off employees and consumers are more careful about where they spend money, perhaps saving more than usual. As a result, the economy decelerates even further. If it slows enough, we have a recession.

During such a time, fewer people are buying homes. Even so, some homeowners find themselves in a situation where they must sell. Families grow beyond the capacity of the home, employees get relocated, and some may even find themselves unable to make their mortgage payment - perhaps because of a layoff in the family.

In the business cycle of real estate, there are buyers' markets and sellers' markets...and some markets in between.  It is all based on supply and/or demand.

Finding Your Realtor by "Accident":

When someone decides it is time to sell their home, they interview several Realtors from different companies to determine which one is best for them. They want someone who will represent them and someone they feel will do an effective job at marketing their home. However, when someone decides to buy a home, they usually end up with their Realtor through sheer accident. Why don’t homebuyers search for a Realtor the same way that homesellers do?

Instead, homebuyers usually end up with a Realtor as a result of answering an advertisement. The advertisement will give a brief summary of a home available for sale along with the price, but it says nothing at all about the Realtor. The ad also does not say whether the property backs to a busy street or if the "ocean view" is available only by leaning out of the second story window with a pair of binoculars.

Listing Agents vs. Selling Agents

You see, there are listing agents and selling agents. Listing agents are the ones who "list" a home for sale on the Multiple Listing Service, and they deal primarily with sellers. Selling agents or "buyer’s" agents do not usually list homes very many homes for sale. They deal mostly with homebuyers. Buyer’s agents sell the homes that are placed in the MLS by the listing agents.

Most agents concentrate primarily on one side or the other.  This is not a "hard and fast" rule.  There are also agents who split their time equally between buyers and sellers.  Often, these are the very best Realtors.  The fact of the matter is, if you are buying a home who do you want on your side?  A Realtor who deals primarily with sellers?  Or one who deals mostly with buyers?

If you call on an advertisement in a newspaper or one of those home selling magazines, you are most likely calling the listing agent. Listing agents place ads for several reasons. First, they need to show the seller that they are doing something to sell their home. Second, by showing how much they advertise, they can also attract other individuals who are thinking of selling their homes. They point to their ads as an example of what they will do to market the house.

Why Agents Advertise - Is it What You Think?

What sellers don’t realize is that a listing agent’s main marketing emphasis is directed toward other Realtors, not the general public. Their main goal is to convince the selling agents (buyer's agents) to find buyers and make offers.  This is a good thing because if you are selling a home, you want as many Realtors as possible bringing buyers around to take a look.  Most of a listing agent's marketing efforts toward other Realtors are invisible to the general public, but it is where an effective listing agent does a home seller the most good.

One reason listing agents advertise homes in newspapers and magazines is to show their clients that they are aggressively marketing the property.  When home sellers constantly see ads from a particular Realtor, they are inclined to want to list with that Realtor.  So even though the ads look like they are directed toward home buyers, they often have another purpose.  To attract home sellers.

Selling agents (buyer's agents) do advertise homes for sale in order to attract buyers. However, they don't really expect you to actually purchase the home you originally call on.  They would be happy if you do, but it happens so rarely that they do not expect it. 

When you call on a real estate ad, you often schedule an appointment to go look at the advertised home. While you are out looking at that home, you will probably want to look at a few others, too. Eventually, you and the Realtor will zero in on what you need and like in the proper price range and you will make an offer.

That is one way of finding your Realtor by accident.

If you are thinking of buying your first home, you should take out a pen and paper right now and draw a line down the center of the paper. Calmly and logically, think of all possible advantages to buying a home and write them down on one side of the page. Afterwards, you should list all the disadvantages.

Then save the list in a place you will be certain to remember.

Sound silly?

Of course it sounds silly. Who needs to write down their reasons for buying a home? After all, home ownership is the central theme to living the "American Dream."

Naturally, while in hot pursuit of this dream you are going to be excited about the future -- researching neighborhoods, searching MLS sites on the internet, viewing homebuyer’s magazines full of appealing homes that are just "minutes from the beach" with "fantastic views" and "cozy family rooms."

Next comes the really good stuff – looking at houses. Full of imagination and optimism for the future, you wander about each home envisioning a happy and contented life for you and your family. The first house may be "too big," and another may be "too small," but you are certain to find one that seems "just right." So you make an offer and wait anxiously and excitedly for the counter-offer. Finally, you and the seller agree on terms and you have bought yourself a brand new home!

Congratulations! Break out the champagne and celebrate!

However…

Later that night or perhaps the next day, you start to worry about whether you made the right decision. Doubtful thoughts will intrude. Can you afford it? Is it the right time? Should you have waited? What if you lose your job? What if this happens? What if that happens? Anxiety and stress set in. Sleep may be hours in coming.

This is a normal response to buying a home and is called "Buyer’s Remorse." You have just made the single biggest purchase you have ever made in your life and it can be downright scary. Logic deserts you. Worry takes over.

Remember your list?

Back when you were thinking semi-logically, you were fairly rational about home ownership. You catalogued the good and the bad, weighed them against each other, and decided that buying a home was the smart thing to do. Reviewing the list will help resolve your buyer’s remorse.

You will not be totally stress-free, but it will help.

Of course, in spite of this advice you will probably not take the time to make that list now – before you buy a home. Hardly anyone ever does.

So when buyer’s remorse sets in and you remember reading this column, here is what you do -- get a piece of paper and draw a line down the center. Then…

You know the rest.

When you prepare an offer to purchase a home, you already know the seller’s asking price. But what price are you going to offer and how do you come up with that figure?

Determining your offer price is a three-step process.

First, you look at recent sales of similar properties to come up with a price range. Then, you analyze additional data, such as the condition of the home, improvements made to the property, current market conditions, and the circumstances of the seller. This will help you settle on a price you think would be fair to pay for the home. Finally, depending on your negotiating style, you adjust your "fair" price and come up with what you want to put in your offer.

Comparable Sales

The first step in determining the price you are willing to offer is to look at the recent sales of similar homes. These are called "comparable sales." Comparable sales are recent sales of homes that compare closely to the one you are looking to purchase. Specifically, you want to compare prices of homes that are similar in square footage, number of bedrooms and bathrooms, garage space, lot size, and type of construction.

If the home you are interested in is part of a tract of homes, then you will most likely find some exact model matches to compare against one another.

There are three main sources of information on comparable sales, all of which are easily accessed by a real estate agent. It is somewhat more difficult for the general public to access this data, and in some cases impossible. Two of the most obvious information sources are the public record and the Multiple Listing Service.

Since you have toured the property you are interested in, you should know how it compares to the general neighborhood. All you have to do is put the home in one of three categories - average, above average, or below average.

When evaluating a home’s condition, there are a number of things you should consider. Structural condition is most important - items such as walls, ceilings, floors, doors and windows. Then paint, carpets, and floor coverings. Pay special attention to bathrooms and bedrooms and whether the plumbing and electricity work efficiently. Look at the fixtures, such as light switches, doorknobs, and drawer handles. The front and back yards should be in reasonably good shape.

The missing ingredient will be information on the condition of the homes from your comparable sales list. Provided you chose the right agent to represent you, they will have actually visited most of those homes and be able to provide key insights.

How Home Improvements Affect Your Offer Price

Even when comparing exact model matches within a tract of homes, you should note whether the previous owners have made any substantial improvements. Cosmetic changes should be largely ignored, but major improvements should be taken into account. Most important would be room additions, especially bedrooms and bathrooms. Other items, like expensive floor tile or swimming pools should be taken into account, too, but should be discounted. A pool that costs $20,000 to install does not normally add $20,000 in value to the home.

Rely on your agent to give you guidance in this area.

Once you find the home you want to buy, the next step is to write an offer – which is not as easy as it sounds. Your offer is the first step toward negotiating a sales contract with the seller. Since this is just the beginning of negotiations, you should put yourself in the seller’s shoes and imagine his or her reaction to everything you include. Your goal is to get what you want, and imagining the seller’s reactions will help you attain that goal.

The offer is much more complicated than simply coming up with a price and saying, "This is what I’ll pay." Because of the huge dollar amounts involved, especially in today’s litigious society, both you and the seller want to build in protections and contingencies to protect your investment and limit your risk.

In an offer to purchase real estate, you include not only the price you are willing to pay, but other details of the purchase as well. This includes how you intend to finance the home, your down payment, who pays what closing costs, what inspections are performed, timetables, whether personal property is included in the purchase, terms of cancellation, any repairs you want performed, which professional services will be used, when you get physical possession of the property, and how to settle disputes should they occur.

It is certainly more involved than buying a car. And more important.

Buying a home is a major event for both the buyer and seller. It will affect your finances more than any other previous purchase or investment. The seller makes plans based on your offer that affect his finances, too. However, it is more important than just money. In the half-hour it takes to write an offer you are making decisions that affect how you live for the next several years, if not the rest of your life. The seller is going to review your offer carefully, because it also affects how he or she lives the rest of their life.

That sounds dramatic. It sounds like a clich?. Every real estate book or article you read says the same thing.

They all say it because it is true.

Disclosures

Although you have toured the property, looked at the walls and ceiling, turned on the faucets and played with the light switches, you have not lived in it. The seller has years of knowledge about his or her home and there may be some things you want to find out about as quickly as possible. For this reason, you will require certain disclosures as part of your offer.

Basically, you want the seller to disclose any adverse conditions that may have a substantial impact on your decision to purchase the home. This would include any problems with the house, whether the property is in a flood zone, a noise zone, or any other kind of hazardous area.

If you have an agent representing you, this is almost automatic, but many states do not require individuals selling their own home to provide you with this information. Often they do not require banks selling foreclosed property to provide these disclosures, either. Obtaining these types of disclosures should always be a part of your offer, and time is of the essence.

Condition of the Property

The last thing you want when you assume possession of your new home is to find it in a total mess. Therefore, you should make it clear in your offer that certain minimum standards are required. If you do not, you might find out the seller or neighbors have begun using the back yard as a trash dump, or something worse – and you would not be able to do anything about it.

Some of the requirements you might want to include in your offer are that the roof does not leak, the appliances work, the plumbing does not leak, that there are no broken or cracked windows, the yard has been kept up, and any debris has been cleared away.

Home Inspections

Besides appraisal and the termite inspection, you should also have a professional go through the house and seek out potential problems. Of course, you will have inspected the home, but you are not used to looking at some things that a professional will find. Even if they are not things the seller is expected to repair, at least you will have foreknowledge of any potential problems.

The seller will want this inspection performed quickly, so that you can approve the results and move forward with the purchase. Once you receive the inspection, you will want to allow yourself sufficient time to review and approve the report. If you do not approve the report, you may negotiate with the sellers on which repairs should be performed and who should pay for those repairs. Otherwise, you can cancel the purchase without penalty, provided you have included timetables in your offer.

Allow a maximum of ten to fifteen days to receive the report and five days to review it.

Final Walk-Through Inspection

Before closing, you will want to revisit the property to ensure it is in the condition you have required in your offer, and to inspect that any required repairs have been performed. You should do this no sooner than five days before you intend to close. Make sure this right to do a final inspection is included in your offer to purchase the home.

Most buyers do not have enough cash available to buy a home, so they need to obtain a mortgage to finance the purchase. Since you will probably make your purchase contingent upon obtaining a mortgage, the seller has the right to be informed of your financing plans in order to evaluate them. That is one of the major reasons that financing details are included in your offer.

Down Payment

As part of your offer, you will need to disclose the size of your down payment. Once again, this allows the seller to evaluate your likelihood of obtaining a home loan. It is easier to get approved for a mortgage when you make a larger down payment. The underwriting guidelines are less strict.

Interest Rate

Another reason for including financing information in your offer is to protect yourself. If interest rates suddenly become volatile and rise quickly, as sometimes happens, you may looking at a mortgage payment much higher than you anticipated. By putting a maximum acceptable interest rate in the offer, you are protecting yourself from such an occurrence.

At the same time, the seller will probably want to see that you have some flexibility in the financing terms you are willing to accept. If interest rates are currently at eight percent and you indicate this is the highest rate you will accept, you would be able to cancel the contract without penalty if interest rates rose past that point. The seller would suffer because they have lost valuable marketing time and may have made their own plans based on successfully closing the transaction.

Asking for Closing Costs and Financing Incentives

There may be times when, as part of your offer, you request the seller to pay all or a portion of your closing costs, or provide some other financial incentive. One common request is asking the seller to provide funds to temporarily buy down your interest rate for the first year or two. Such incentives can be especially effective if a buyer is tight on money or pushing their qualifying ratios to the limit.

Whenever you ask for incentives such as these, you will probably find the seller less willing to negotiate on price. After all, what you are really asking for is have the seller to give you some money to help you buy their house. The end result is that, for a little relief in the beginning, you are willing to pay a little more in the long run.

Seller Financing

Another occasional request is to have the seller "carry back" a second mortgage to help facilitate your purchase of their home. In cases when the seller does not need all the proceeds from their sale in order to purchase their next home, this is an option. The advantage to the buyer is that by combining your down payment and the second mortgage from the seller, you may be able to avoid paying mortgage insurance and save yourself some money.

If such a carry-back is part of your offer, you should include the terms you wish to pay on such a second mortgage. Keep in mind that your first trust deed lender needs to know this information so they can underwrite your loan, and they have certain minimum requirements. The minimum term of the second mortgage can be five years. The minimum payment can be "interest only." Longer mortgage terms and payments that also include principle are also acceptable.

Cash Offers

If you are one of those rare individuals making a cash offer to buy a home, it makes sense to provide some documentation with your offer that shows you have the funds available. A bank statement would be fine. If you have to liquidate stock or some other asset, your offer should give a timetable on when you will provide proof you have converted the asset to cash.

Other Financing Details in Your Offer

Your offer should also contain information on whether you are obtaining a fixed rate or an adjustable rate mortgage. It should also state whether you are obtaining conventional financing or obtaining a VA or FHA loan.

If you are obtaining a VA or FHA loan in order to finance your purchase, you must include that information in your offer. This is because government loans place additional financial and performance obligations on the seller.

Non-Allowable Fees

First, VA and FHA loans prohibit buyers from paying certain types of fees that are often charged by lenders, escrow companies, settlement agents, and title companies. They are called "non-allowable" fees. They still get charged anyway, but as the buyer, you are "not allowed" to pay them. The result is that the seller ends up paying them instead of you.

Most of these "non-allowable" fees come from your lender. By the time you are making an offer you should have already been pre-qualified by a loan officer, so you or your real estate agent can ask how much the lender’s non-allowable fees will be. Experienced agents should also have an idea of what non-allowable fees will be charged by the escrow or settlement agent and the title insurance company.

Since these are fees the seller would not pay on an offer with conventional financing, this information must be included in your offer. You should also realize that since the seller will be paying these additional fees, they may be a little less negotiable on the price.

VA and FHA Appraisals

Home appraisal inspections on FHA and VA loans are a little more detailed than on conventional loans (and more expensive). The appraisers are required to perform certain minimum inspections as well as evaluate the market value of the property. Although these inspections are not as detailed as a professional home inspection and should not be considered a substitute, sometimes repairs are required.

These are additional costs the seller would not be obligated to pay for someone obtaining conventional financing, so your offer should include a maximum figure for these repairs. Otherwise the seller is signing the equivalent of a blank check, and they do not want to do that.

At the same time, whatever figure you put in will most likely affect the seller’s willingness to negotiate on price. If you put $500 as an estimate, the seller may be $500 less negotiable on their price. If no repairs are required, you may have been able to get the house for $500 less than what you and the seller agreed on as the price. The solution is to add a clause to your offer that goes something like this. "If required repairs cost less than the maximum amount allowed, the excess will be credited toward buyer’s closing costs."

You and the Seller Must Agree

Buying a home does not occur in a vacuum, involving only you and the seller. There are all kinds of people and services involved behind the scenes to make it happen. Since some of these services affect both you and the seller, there will have to be be agreement on which companies you will use for them.  When you make your offer, you should request your favorites for these services.  If you are unfamiliar with these service providers, you can get recommendations from your agent.

Escrow and Settlement

For example, you are going to need an escrow or settlement company to act as an "independent third party" between you and the seller. Without having a third party involved, how do you know that when you fork over the money, you are going to get the deed? This is the type of service provided by escrow and settlement. They will hold your deposit and coordinate much of the activity that goes on during the escrow period.

Since this third party is very important to both you and the seller and both of you will pay fees to this company, it is important to agree on which service to use. Therefore, your choice should be part of the offer. Since you do not buy a home every other week or so, you are probably unfamiliar with companies that provide this service. Your agent will make a recommendation. You have the authority to accept this recommendation and include it in your offer, or make your own choice.

Keep in mind that the seller will also have a preference and this may be a point of negotiation in a counter-offer. It has become customary that one side will choose the escrow/settlement agent and one side chooses the title insurance company. Even so, everything in real estate is negotiable.

Title Insurance Company

Title insurance is important because, by providing you with an Owners Policy, they insure that you have clear title to the property. If there are any problems later, you can always go back to the title insurance company and have them clear it up. Since it is customary for the seller to pay for the owner’s policy, they have an interest in which company is used.

However, you are going to pay a fee to the title insurance company, too. This is for the Lender’s Policy. The lender’s policy insures your mortgage lender that there are no liens or judgments against the property and that the mortgage will be in first position. In other words, should you sell the property or refinance it, their mortgage gets paid first, before any other claims against the property.

The lender’s policy is less expensive than the owner’s policy.

Termite and Pest Inspection

As part of your offer, you may require a termite and pest inspection. This company not only inspects for termite damage and pest infestations, but also inspects for dry rot and water damage, among other things. The company that performs the inspection is important to you as a buyer, because you want to be sure they do a good job. It is important to the seller because it is customary that they pay for the inspection and some types of repairs that may be required.

You should determine which company you want to perform this inspection and make it a part of your offer. Otherwise the seller will choose. If you do not know which company to hire, your agent will make a recommendation.

There are many things that should be considered when buying a home. Since most homebuyers expect to buy a bigger and better home someday in the future, resale value is an important factor in decision-making. You use the proceeds from selling one home to buy the next one.

While no one can guarantee that your home will grow in value, there are steps you can take that maximize your potential gain.

"Location, Location, Location"

"Location, location, location," is a common and almost hackneyed phrase in real estate literature. Your agent may even throw it at you when you ask for advice about buying a home. However, what does "location, location, location," actually mean? Why repeat it three times?

Mostly, "location" is repeated to emphasize that it is extremely important to the resale value of your home. The idea is to buy a house that will appeal to the largest number of potential future homebuyers. A careful choice of location can minimize potential negative influences on future resale value, and maximize positive influences.

Focusing on resale value requires you to make several different "location" choices. The first choice you have to make is "which community?" At the very least, you should narrow your choice down to just a few local communities.

Buying a Home With a View

Homes with a pleasant view of the horizon often sell at a premium above similar homes without the view. However, if a view is important to you, buy it mostly for your own pleasure and not as an investment. Though you may place a considerable dollar value on the view, future buyers may not be so like-minded. It may take you longer to find a buyer when it comes time to resell the house. Or you may end up dropping your price to more nearly match other sales prices in the neighborhood.

In short, if you are buying a house with a view, try to pay as little extra as possible. Otherwise, you might not get your money back.

Lot and Landscaping

Even though most real estate value is usually concentrated in the building, the lot is important, too. Obviously, it should be as level as possible. Assuming the property is in a typical neighborhood, the lot should be rectangular – no odd shaped lots or oddly situated lots.

Yard sizes are smaller in modern homes than in older homes, but there should still be a decently sized front and back yard. Do not buy a house where the entire back yard is taken up by a swimming pool, for example.

Do not purchase an over-landscaped property, either. You would normally pay a premium for that, which you may not be able to recover when you sell. You will get your best value if the house is moderately landscaped or under-landscaped for the area. You can always improve the landscaping during your ownership by improving the grass and adding bushes and trees. Just do not spend too much.

House Size

In each residential neighborhood, houses will vary in size and rooms, but they should not be too different. If resale value is an important consideration, you should not buy the largest model in the neighborhood. When determining market value, the homes nearest to yours are most important. If most of the nearby houses are smaller than your house, they can act as a drag on appreciation.

On the other hand, if you buy a small or medium house for the neighborhood, the larger homes can help pull up your value. This is one of those times where determining your "wants" versus your "needs" can be extremely important. Buying what you need in a more prestigious neighborhood may provide more financial reward than getting what you want in a less desirable neighborhood.

Bedrooms and Bathrooms

Three and four bedroom houses are the most popular among homebuyers, so if you can stick in that range you will have more potential buyers when it comes time to resell. Five is okay, too, as long as you do not have to pay too much extra for the additional bedroom.

There should always be at least two bathrooms in a house, preferably at least two and a half. One bathroom with a place to wash up for day-to-day visitors, one for the master bedroom, and at least one to be shared by the other bedrooms.

Closets, Garages, and Laundry

Walk-in closets are extremely desirable for the master bedroom. For the rest of the house, just be sure there is plenty of closet space. Don’t forget space for linens and towels.

Garages add to the resale value and you should always make sure to get at least a two-car garage. Lately, three-car garages have become desirable in some areas of the country.

The laundry facilities should be located somewhere convenient on the main floor of the house, but not in a place it will create an eyesore. Think about whether you want to walk up and down stairs when carrying loads of laundry.

The Kitchen

Family activity centers around the kitchen, so this is the most important room of the house. Larger kitchens are better, and they should be provided with modern appliances. Obviously, the dining room and breakfast nook should be located adjacent to the kitchen. In newer houses, the family room should also be extremely close to the kitchen.

There should be easy access to the back yard, as there will be occasions for barbecues and outdoor entertaining. In addition, it should be a short trek between the garage to the kitchen so hauling groceries in from the car does not become a horrendous chore.

Fireplaces

The only room where you absolutely have to have a fireplace is the family room. A fireplace in the living room may be nice, but you pay extra for it and will probably rarely use it. At best, it serves as a focal point of the living room, but does not add much in real value.

Swimming Pools

Swimming pools do not provide as much added value as they once did. Safety issues about families with younger children have become more publicized than in the past, so families with small children tend to avoid homes with pools. As a result, having a pool may actually reduce the number of potential homebuyers when you try to resell the home.

Buy a home with a pool for your own enjoyment, not as an investment.

Since we are on the subject of swimming pools, here is a word of advice: If you want a pool, buy a home that already has a pool. Paying a contractor to install one for you is like throwing money away. You will never get a dollar-for-dollar return on your investment.

If you are thinking of buying your first home, you should take out a pen and paper right now and draw a line down the center of the paper. Calmly and logically, think of all possible advantages to buying a home and write them down on one side of the page. Afterwards, you should list all the disadvantages on the other side of the line.

Then save the list in a place you will be certain to remember.

Sound silly?

Of course it sounds silly. Who needs to write down their reasons for buying a home? After all, home ownership is the central theme to living the "American Dream."

Naturally, while in hot pursuit of this dream you are going to be excited about the future -- researching neighborhoods, searching MLS sites on the internet, viewing homebuyer’s magazines full of appealing homes that are just "minutes from the beach" with "fantastic views" and "cozy family rooms."

Next comes the really good stuff – looking at houses. Full of imagination and optimism for the future, you wander about each home envisioning a happy and contented life for you and your family. The first house may be "too big," and another may be "too small," but you are certain to find one that seems "just right." So you make an offer and wait anxiously and excitedly for the counter-offer. Finally, you and the seller agree on terms and you have bought yourself a brand new home!

Congratulations! Break out the champagne and celebrate!

However…

Later that night or perhaps the next day, you start to worry about whether you made the right decision. Doubtful thoughts will intrude. Can you afford it? Is it the right time? Should you have waited? What if you lose your job? What if this happens? What if that happens? Anxiety and stress set in. Sleep may be hours in coming.

This is a normal response to buying a home and is called "Buyer’s Remorse." You have just made the single biggest purchase you have ever made in your life and it can be downright scary. Logic deserts you. Worry takes over.

Remember your list?

Back when you were thinking semi-logically, you were fairly rational about home ownership. You catalogued the good and the bad, weighed them against each other, and decided that buying a home was the smart thing to do. Reviewing the list will help resolve your buyer’s remorse.

You will not be totally stress-free, but it will help.

Of course, in spite of this advice you will probably not take the time to make that list now – before you buy a home. Hardly anyone ever does.

So when buyer’s remorse sets in and you remember reading this column, here is what you do...

...get a piece of paper and draw a line down the center. Then…

You know the rest.

When Your Home's Value is Less Than the Mortgage

For a variety of reasons, it is possible that the total debt on your home may be more than what the home is worth. Most of the time, this isn't a problem because time is the solution. Depending on how much you owe, just wait it out and the value of your home goes up.

Problem solved. Unfortunately, this could take years.

This solution does not work for everyone though, because some folks are stuck in a situation where they absolutely have to sell their house.

This can happen for many reasons, some good and some not so good: relocation, financial hardship, divorce, death, illness, or anything at all. The result is that you may have to move, but you can't sell your house and make enough on the sale to pay the closing costs.

So what do you do?

One option is to do nothing and not make your mortgage payment. That's a worst-case scenario because it impacts your credit rating more severely than anything else possibly can.

Another option is something called a "short sale." This is when you fess up to the lender, let them know about your hardship and ask them to accept less money than you owe.

Of course, the lender doesn't want to do that, but they also don't want to pay all the costs of foreclosing on a home, repairing any defects, placing it on the market, and getting the best price they can in what may be a market already overstressed with excess inventory.

Lenders absolutely hate to foreclose, so they may be willing to consider a short sale.

Not always so don't get your hopes up.

A short sale involves a lot of paperwork, time and effort and it is best if you have a real estate agent or someone knowledgeable to help guide you through the process and give moral support. A lot of stress is involved.

The first step is to contact the Loan Service Department of your lender. That number will be in the documentation you receive about making your payment. Use the phone and the mail. Keep copies.

The lender will ask you to submit a financial statement. They want to know that you really don't have the financial assets to repay the loan after you sell the home.

That's just the beginning, assuming they give a tentative agreement.

Your real estate agent still has to put the home on the market, find a buyer, and get a bona fide offer. Once that has been accomplished, you submit all contracts and paperwork to your lender for a decision. This takes a while because there are several decision makers involved.

Your lender isn't usually your lender. They just service the loan for your actual lender, called the investor. Your paperwork is submitted to the investor for a decision.

Assuming you have mortgage insurance on the loan, they are another decision maker in the process. Mortgage insurance covers lenders in the case of loan defaults. That way they can justify making high LTV (loan-to-value) loans.

If the investor and the insurer both agree, your short sale is approved, and you can sell you home.

A short sale is basically a "forgiveness of debt." That counts as income and you have to declare it to the IRS.

Should You Buy a Home in Today's Market? (May 2007)

Before we start, let us give you one reason to not buy a new home right now.

How long do you intend to live there?

A rule of thumb is that it rarely makes sense to buy if you expect to move within two years. That's because when you do sell, there are costs associated with selling. We're not just talking about sales commissions to the buying and selling real estate brokers. Most owners rely on home appreciation to pay those costs and to provide the down payment and closing costs when they buy their next home. So buying a home when you expect to move before too long is a risk, especially in an uncertain market.

However, most buyers live in their new home an average of seven years or more. If that fits you, it almost always makes sense to buy rather than rent, in practically any market.

Why? First, if you are thinking about delaying a purchase because you want to "time the market" to get the very best deal, that is almost impossible to do with precision. Even if you are in an area with declining market prices, the most knowledgeable experts cannot reliably anticipate the "bottom" of a real estate market. Afterwards, they can look back and say, "The market began to turn in 1997," like it did in some areas of California that had a tough market in the nineties. Before the turn, though, no one knows.

Second, if you aren't an owner, you're a renter. Renting is just throwing money away. You don't get to reduce your income taxes by itemizing deductions like property taxes and mortgage interest.

As a renter, you are limited on what changes you can make to your living quarters. As an owner, you can paint your living room chartreuse if you want or put in an avocado green carpet. You can change light fixtures, garden and landscape. You can do whatever you want that makes your home a comfortable place for you and your family. It's your home, not a temporary place to sleep and eat until you do buy a home.

Third, interest rates are very low right now. If you wait, interest rates could be higher. That means your monthly payment could be higher, too. No one can predict rates that far in the future, of course, but rates are very low right now.

Plus, the easiest way to accumulate wealth is through home ownership. Three out of four people have more equity in their home than assets in retirement plans, stocks, mutual funds, and savings. Though no one can guarantee your property will appreciate, over time it generally does. Over the long term, you can generally count on it. In the last five years, the median price of homes all across America has increased in value approximately 10% per year. Usually, it's not quite that high.

Admittedly, there are some areas that had more rapid appreciation in recent years. Those markets may suffer from lower price-growth than the rest of the nation or region over the next couple of years.

How do you minimize the possibility of lower appreciation for your home?

Determine your price range. Then choose a neighborhood where your target price is in the lower tier of prices in that neighborhood. That way, your home has less vulnerability on the down side and the higher-priced homes will help pull you up during hot markets.

Also, try to steer away from homes on busy streets or homes that back to busy streets. Buy a house as close to the center of the tract as possible. Don't buy houses across the street from a park or a school. Try to buy in a homogeneous area, where all the homes are similar to one another. For example, if you are buying a single family home, you do not want to buy next to an apartment or condominium complex.

Finally, talk to a real estate agent and ask for advice. Ask them what the market is like in your area.

Best of all, there are LOTS of sellers out there right now. Inventory is high. If you make an offer, ask for incentives to buy that particular home.

If you are putting ten percent down or more, you can ask for up to six percent of the purchase price in incentives. These incentives cannot be rebates of cash or help with down payment, but you can ask the seller to pay your closing costs. You can also ask the seller to pay for a temporary interest rate "buydown" that lowers your payment over the first one to three years and still gets you the security of a fixed rate mortgage -- and fixed rates are very low right now.

If you're putting down five percent or less, you can still ask for incentives. The amount you can ask for is limited to three percent of the purchase price. The reason there are limits is because you are going to finance the purchase with a mortgage and lenders have guidelines on how much sellers can provide in incentives. Those guidelines help them limit loan fraud.

Talk to a real estate agent. Have that agent recommend a lender who will talk to you about incentives and explain what you can request.

Good luck.

The "Home Wealth" Effect

In America, the most common way to accumulate wealth is through home ownership.

At the time of a survey conducted by the National Association of Realtors, the "average" homeowner has $50,000 in "unrealized wealth" in their home. Those families with incomes over $75,000 averaged $100,000 in "unrealized wealth." Families with incomes less than $40,000 averaged $40,000 in unrealized wealth.

"Unrealized wealth" just means your house is worth more than what you owe on it. This is also called "equity." Savings. You own an asset that appreciates in value.

Over the last year, the "average" house increased 7.1% in value. Since the "average" house is worth $153,300, that means in one year the "average" homeowner accumulated $10,884 in wealth -- by doing nothing more than making a mortgage payment (plus taxes and insurance). Since interest and property taxes reduce your taxable income, the federal government is subsidizing this increase in "home wealth."

Three out of four homeowners say their "home wealth" is greater than their "stock wealth."

The most common way to "tap in" to unrealized wealth is to refinance and pull cash out of the home, get a home equity line of credit or sell your home. At least forty percent of those who sell their home use some of the money to buy a bigger, better, or newer home.

Renting does not accumulate wealth.

Statistics and figures come from the "home wealth" survey of the National Association of Realtors conducted in August and September of 2001.

Why close at the end of the Month?

Mostly, this has to do with lowering your out of pocket costs by minimizing the amount of "prepaid interest" you pay on your mortgage at closing.

Interest on your mortgage begins running from the date your transaction closes, but most loans are due on the first day of the month. So when you close, you "pre-pay" the interest between the closing date and the end of the month.

For example, if you close on the 29th of October, you prepay one day of interest to cover the rest of October's interest. Your first payment will be due December 1st, when you will actually be paying November's interest.

As a different example, if you close on the 6th of November, you prepay 24 days of interest. This means you have to bring in more cash to close your real estate purchase than would have been required by closing just eight days earlier.

However, the benefits of a late-in-the-month closing are only short-term.

With the October 29 closing, your first payment due-date will be December 1. With the November 6 closing, your first payment is not due until January 1.

It just takes less cash "out of pocket" to close near the end of the month. That is the major benefit.

The Multiple Listing Service

MLS stands for Multiple Listing Service.

Basically, the MLS is a big property warehouse - sort of like a "home depot." When property is available for sale, it goes in the warehouse. When it is sold, it gets taken out of the warehouse.

Since real estate cannot actually be stored in a warehouse, the MLS only contains information.

So the MLS is actually a database - an extremely convenient way to know what is available for sale at a given moment. That is why real estate agents developed the MLS. Quick knowledge of home inventory made agents more productive.

The Evolving MLS:

Since developing and maintaining the MLS system wasn't free, agents created local "MLS Associations," required membership, and charged each other annual dues (plus additional fees) so that they could pay for the necessary staff and materials to make it work.

In the really olden days, an agent submitted listings to their local association and the MLS staff compiled the data on what was available for sale and what had been sold. Once a week (or so) MLS members received a book that showed all the current listings.

Then (in the "merely" olden days) computers came along and made it easier to create the listing books. When modems came along the books were no longer necessary, though it took agents awhile to adjust. MLS members could now "dial in" directly to the computer.

Finally, along comes the information age -- and the Internet.

Beginning in 1996, some property information from the MLS was placed on the web. It isn't as current as dialing directly into the computer, and information on the web does not contain all the properties available in the MLS. Plus, there is no national MLS or database. Information you find on the web is compiled from local and regional MLS systems, not all of which participate on the web to the same extent.

Why the MLS works for home sellers:

The whole MLS idea is a boon to sellers because of "supply and demand."

How can you, as a seller, get access to the largest number of buyers? Placing an ad in a newspaper? Or putting your home information into a computer accessible by every MLS member who will show your property to their qualified buyers in your price range?

Being placed in the MLS expands a home seller's sales force, exposes the property to a larger pool of prospective home buyers, and creates more demand for the property. The higher the demand, the more pricing power enjoyed by the homeowner - and the quicker a home will sell.

Why the MLS works for home buyers:

It is extremely convenient, does not cost a penny to buyers, plus...

...you get a qualified and experienced guide to help you through the complicated process of becoming a homeowner.

Accessibility and the Lockbox

If you are selling your home, you should not be present when an agent brings a potential buyer to view the property. Successful marketing means that buyers need to be able to imagine the house as their future home. Nothing puts a damper on that more than having the current owners hanging around.

That is one reason why the lockbox is such a key tool for real estate agents.

A lockbox is a hollow metal box that attaches to the front doorknob or some secure place nearby. Inside the hollow area is another matchbox sized box that contains the key to the house. When an agent opens the lockbox, that smaller container slides out.

The lockbox gets its name because it is a locked box. A stranger cannot come by, open the box, get the key and gain entry to the house.

Only agents can do that.

Most modern lockboxes have a tiny microprocessor inside. You need an electronic key to open it and the only way to get a key is to become a member of the local Multiple Listing Service. All of the keys have a unique identifier so when someone opens the box, the microprocessor inside “registers” the agent who opens it. Agents are forbidden to let another agent use their electronic key.

Since the box is “reset” just before being placed on the door, any agent who opens the box can be identified – as well as the date and time they entered the house. That information can be downloaded at the local MLS Association. This works as a security measure for the homeowner.

But the main purpose of the lockbox is that it facilitates the sale of the home. Without it, selling or buying a home would be much more difficult.

Think of the alternatives.

Without a lockbox, the seller would have to be present when the buyer came by with their agent, and that does not really help to sell the home. Sellers could leave the door unlocked, of course, but in today’s security-conscious world, that is not a great idea.

One possibility is that the seller could give a key to their listing agent, but then the listing agent would always have to be present when another agent brought a buyer to the home. Showings would have to be scheduled tightly and that would be an inconvenience to the listing agent and the buyer’s agent…

…and it would be an inconvenience to the buyer..

Location, Location, Location -- What Does That Mean?

When a homebuyer is thinking of buying a home, they sometimes wonder aloud about the most important thing they should consider. Of course, you need to find a home that provides everything you need in a home, but after that?

A Realtor often replies with the phrase, "location, location, location."

It's become an almost hackneyed phrase, but it still has meaning.

Where a home is located is the most important factor in it's value -- both now and in the future.

For example, suppose you are buying a new home and have a choice between two identical houses. One is located close to the center of the tract and the other backs up to a potentially busy street. The house in the center of the tract will have a greater value.

On the other hand, you may be able to buy a four bedroom house on the edge of the tract for the same price it would cost to buy a three bedroom house on the interior of the tract.

And so on...

In an old-fashioned neighborhood with square blocks, a house in the middle of the block will have more value than an identical house located on the corner. Corners have more traffic.

A single family house in an area where there are mostly other single family homes will retain its value better than a similar home in an area where there are apartments, condominiums, or businesses -- not because apartments and condo are "bad" -- but because the neighborhood is fairly homogeneous. All the properties are similar to one another.

And so on...

A home in a thriving vibrant community will have more value than a home in a city where industries are failing, the roads are uncared for and schools are on the decline.

All other things being equal, a home in a desirable location is more valuable than an identical or similar home in a less desirable location.

So when deciding what you "need" in a home versus what you "want" in a home, sometimes it makes sense to settle for what you need in a desirable location -- providing resale value is important to you.

That's all real estate agents mean when they say "location, location, location." Location is important because it is the greatest determining factor in value.

When Market Value Outpaces Appraised Value

A home's market value is the perception of the buyer.

Sometimes, most often in a situation with multiple buyers, offers will be made that exceed the listing price. Buyers fall in love with a house so much that they are willing to risk that it might not appraise at the purchase price.

Believe it or not, appraisals do not always keep up with market value.

Why not?

Appraisals:

Appraisals are performed for lenders, not buyers. The purpose is to justify the sales price so that the lender feels they are making a solid investment since the property is collateral for the loan. On appraisals, most weight is given to historical data - sales that have closed in the last four months.

In the last four months the average sales price of a resale home in the United States has increased by $20,000. In some areas, it is more - in other areas, less. And that is just the "average" house.

Appraisers try to make allowances, but because they have rules and guidelines to follow, there are times when they cannot - especially in dealing with multiple bidding situations and in areas where there are fewer recent sales.

Preparing in Advance:

Given the recent sudden increase in home prices, what happens when a buyer knowingly bids so high that he risks the appraisal coming in low?

Sellers in this situation need to prepare by counter-offering that appraised value is not a contingency of the transaction. That almost automatically disqualifies buyers making minimal down payments, because a low appraisal will affect their ability to qualify for the loan - unless they have additional funds available to make up the difference.

Buyers need to be prepared in advance for the possibility that the appraisal might not match the market value in certain situations.

Coping With the Challenge:

You see, lenders base the loan amount on either the appraised value or the purchase price, whichever is lower. If a buyer is applying for a five-percent-down loan and the appraisal comes in low, the loan amount will be calculated based on the appraised value. The required down payment will be five percent of the appraised value, plus the difference between the appraised value and the purchase price. That requires additional cash. If the buyer does not have the additional cash available - or is "surprised" by a low appraisal - that puts the transaction in jeopardy.

Which means the seller needs to start over and find another buyer. All the advantages of the multiple-offer situation have been wasted.

Conclusions:

So...when accepting high offers, sellers should ensure the buyer has enough additional cash available to make a larger down payment - should it be necessary - and the knowledge that a low appraisal is a possibility, so that there is no sudden temptation to renegotiate.

Buyers should be prepared for the possibility that they may have to make a larger down payment than anticipated.

That's why qualified real estate agents are so important - they anticipate challenges and solve them before they become problems.

Real Property vs. Personal Property

When selling or buying a home, you need to think ahead about what you are actually selling along with the property and the house.

The general rule is, "if it attached to the structure or the ground, it is real property and stays with the house."

This confuses some people, especially when selling their first house.

For example, as a renter you may have been used to removing your curtains and taking them with you when you move. Since they are probably "attached" to the wall in some manner, the buyer may assume all window coverings are staying with the house.

This can cause a disagreement. Disagreements in real estate spread like viruses, moving from minor issues to more major issues. Emotions rule and logic melts away like a scoop of vanilla ice cream on a black asphalt playground in August. It can become an ugly sticky mess.

Disagreements have the potential to become "problems" -- except that in real estate, problems don't exist. We have "challenges" instead.

If your Realtor refers to something as a "challenge" -- you may have a problem.

So if you want to take your curtains with you, put it in the contract. Don't "assume" anything...

...because buyers and sellers can argue about the silliest things.

Believe it or not, there is a story about how a deal fell apart because the buyer wanted the sellers to leave the welcome mat. It must have been a really nice welcome mat. Normally, sellers are free to take their welcome mat with them when they move.

Another incident involved the gas logs in the fireplace. The sellers wanted to take them and the buyers wanted them left with the house. Normally, gas logs stay with the fireplace. Real wooden logs you are free to take with you when you move.

Chandeliers are another common argument point.

The point is that you need to think about these things in advance. If you have to unscrew a screw, claw out a nail, detach anything from the interior or exterior structure, or uproot anything from the ground -- and you want to take it with you when you move -- put it in the contract. That way there are no possible misunderstandings later.

It doesn't hurt to go through the house "room by room" with your agent so that all possible challenges are handled in advance.

Contingencies & Negotiations in Real Estate Contracts.

Some buyers make an offer to buy a home before they even list their own home for sale. However, they need to sell their present home in order to come up with the down payment to make the purchase. So they make their offer "conditional" on the successful sale of their own home.

That is a "contingency."

Actually, it is a major contingency.

Contingencies are important in real estate contracts because they limit a buyer's or seller's responsibility to fulfill the contract and close the deal. Some are major, some are minor.

Some contingencies are frowned on -- others are not. Other contingencies are "normal."

For example, in a seller's market most sellers would not accept the contingency listed above. A potential buyer with a home to sell should already have their home listed AND have an accepted offer from a "ready, willing and able" buyer.

Other contingencies make perfect sense.

For example, a buyer might want to make their purchase "contingent" upon their ability to obtain financing. If they can't get the loan, they can't buy the house anyway, so it is a contingency that makes sense.

Another buyer may want to make his offer contingent on the home appraising at (or above) the purchase price. Since the appraiser is hired by the lender and is independent of the actual transaction, that is another contingency that makes sense.

In addition, there are loads of inspections. Buyers will often want to make sure the property passes these inspections, so these become additional contingencies...

...and that is what makes a real estate contract different than most contracts.

Most contracts are set at the time of offer and acceptance. They are a "done deal" and both parties are liable to fulfill their obligations no matter what. If either party attempts to renegotiate any point, the other party can "void" the original offer and acceptance.

Real estate contracts have specific clauses which allow renegotiation in limited areas.

For example, a real estate contract may require a buyer to get his home inspection completed in fourteen days. It allows the buyer three days (or whatever) to review the inspection and report any problems to the seller. If no problems are reported, that contingency automatically disappears.

Suppose the inspection is performed within the required time frame, it shows a cracked tile in the corner by the fireplace, and the buyer reports that problem to the seller.

What happens next?

The buyer and seller renegotiate that aspect of the deal. It's a legal contingency. It is subject to renegotiation.

The seller may decide to replace the tile -- or he may decide not to replace the tile. The buyer decides whether it is worth losing the house over a broken tile or not. The seller decides whether it is worth losing a buyer over a small thing like a broken tile.

That example was purposely minor. The problem could be a faulty roof. That would require more serious thought.

Contingencies are a part of real estate contracts and so are renegotiations -- but only in limited areas and according to the contract. Some buyers and sellers never fully read the contract -- be sure to read yours.

If You Think You Need a Bridge Loan

You're thinking of buying a house so you go out with a real estate agent and find the perfect "move-up" home. You fall in love with it. If you're a married man, your wife falls in love with it. Same difference. So you present an offer. The only problem is that you need to sell your house in order to buy that house.

But you haven't even put your house on the market yet.

So you make a "contingent" offer. Your offer to buy is contingent upon your ability to sell your house in time to close.

You haven't even listed your house yet. That's a little bit "too" contingent for most sellers nowadays. They are likely to turn you down.

Bummer.

In hindsight, you realize you should have listed your house first, got an offer (and accepted it), then gone out looking for a new home.

But it's too late and you really want that home.

The real estate agent suggests you get a "bridge loan." If you have enough equity in your present home, this is a special loan that allows you to get some cash so you can make a down payment and buy the new home. Interest rates are high, points are high, and there are costs and fees involved.

It's cheaper to borrow from your 401K (if you have enough money in it). Lenders allow that as a source of funds for down payment. Any secured loan is an acceptable source of funds for a down payment. If you have stocks or bonds or an insurance policy, you can borrow against that, too. Even a car. Any loan "secured" by a physical or financial asset.

Or you can get a "gift" from a family member to make up whatever shortfall you need.

Or...if you have enough equity and can qualify for a bridge loan, you can qualify for a home equity line. It only costs about $350 at your local bank.

Just get the loan before you list your property for sale.

Asking the Seller to Pay Closing Costs

Some aspects of real estate become very routine to real estate agents, who deal with the same issues over and over. However, these same issues are sometimes new to buyers and sellers - and not immediately understood.

This situation came up recently between a buyer and seller.

A home was listed for sale at $210,000. The excited buyer made an offer to buy the home at $203,000, asking the seller to pay all of their closing costs.

The seller scratched his head. How much are closing costs, anyway?

Closing costs can vary widely, mostly dependent upon the cost of the mortgage loan. The "smart" thing for the seller to do is make a counter-offer and place a limit on the amount of closing costs he will pay on behalf of the buyer. Otherwise, how can the seller anticipate how much he will "net" from the sale of his home?

In this case, the seller countered with a price of $208,000, agreeing to pay $5000 of the buyer's closing costs.

This time the buyer scratched his head.

"That's no deal," he complained to his Realtor. "The seller just took my offer and added in the closing costs." .

The buyer figured he wasn't getting anything "free" at all. By adding the closing costs to the purchase price, most of those costs would be a part of the loan. Instead of getting his closing costs paid for free, he would be paying them over the life of the mortgage loan.

"That's exactly how it works," explained the Realtor, smiling patiently.

"Suppose the seller had accepted your initial offer of $203,000," continued the agent, "and your closing costs had actually been $5000 -- you would still have been paying most of those closing costs over the life of the loan. The difference is that - if you had paid your own closing costs - you could have got the house for $198,000.".

Counteroffers went back and forth until the final figures were agreed upon.

When a seller pays your closing costs, what makes it a "deal" is that it takes you less cash to buy the home. You don't "save" any money -- you just save it for now.

...and that can be very important, especially if your funds are limited.

What makes an agent truly valuable?

Recently, an excited first-time homebuyer spent some time telling a real estate agent what she wanted in a home. They also discussed financing. Immediately afterwards, the agent took her new client out and showed her...

...two homes.

One was perfect.

Instead of making an offer right away, the buyer went home and called her friend. The friend had a real estate license. The buyer and her second agent presented an offer on the home, leaving the first agent totally in the dark.

After all, the first agent hadn't worked "too hard."

Which made me think about what really makes a real estate agent valuable, among other things.

Knowledge of inventory was near the top of the list.

It sounds boring and unexciting. Bookish, even.

You see, the reason the first agent knew which houses to show her potential client was because she had previewed those properties. That's one of those things agents do that you don't know about. They go out on their own, by themselves or with other agents, and look at property after property after property. They know what models are located where, how long they've been on the market, which ones have listing agents that are easy to work with, and more. They know all kinds of things that you don't know they know.

Not only that, the agent had been previewing properties for what "seems like forever" - so she immediately knew which houses to show the soon-to-be-excited buyer. She had been to those homes and/or model matches for those homes - for quite some time.

She knew her inventory.

The friend did not know the inventory. Otherwise, the buyer would have gone to her friend first, right?

It's like wandering around the aisles of a drug store not knowing which over-the-counter cough syrup is best for your particular ailment. Who would you rather ask? The clerk at the register or the pharmacist?

Either way, you're walking out of the store with a cardboard box filled with thick sloshy liquid.

So what you're really hiring in an agent is knowledge - and not just knowledge of inventory. Knowledge of lots of things that you don't even know you don't know. They make it seem easy, but that's because they want it to seem easy. If agents told you how hard it was, you would be even more nervous about shelling out hundreds of thousands of dollars.

After all, it is only the most expensive purchase you've ever made in your life.

But it's only a house, right?

And everyone knows that a Schedule 1 item on a termite report must be repaired prior to closing, which Schedule II items do not. And all those other little details.

By the way, the first agent and the listing agent talked to one another because she expected to present an offer shortly. No details, of course - just the name of her client and to expect the offer.

The buyer did present an offer, but with the wrong agent. This took the listing agent by surprise. Like many industries, real estate agents have a code of ethics they are supposed to obey. At the same time, agents don't always know what their clients are up to. Anyway, imagine how negotiations went, if they went anywhere at all. Plus, there were other problems that will be saved for another article.

Which isn't really the point. The point was that you hire an agent because of training, knowledge, experience, problem-solving ability, connections, their ability to communicate...and lots of other neat stuff.

The moral I promised?

You don't know what you don't know.

Which is why you hire people that will cover the blanks you know about, as well as the ones you don't. That is where you find the true value of a real estate agent.

The Earnest Money Deposit

Most offers to buy a house are accompanied by a check. This check is generally referred to as the "earnest money deposit." The basic reason for the deposit is to impress the seller that the buyer "earnestly" intends to purchase the property.

The amount of the deposit varies from purchase to purchase, depending on a variety of factors. If a property generates a lot of interest, a buyer may make a larger deposit to convince the seller that their offer is stronger than the others. During "hot" markets, deposits are generally larger than during slow markets.

In normal times, buyers should hesitate before making a deposit that is larger than two percent of the purchase price. Underwriting guidelines sometimes require strict documentation of such deposits. A buyer may often be required to show a bank statement just prior to the date of the check, plus evidence that the check actually cleared the bank. If you're closing quickly, this might require a trip to the teller window at your bank.

There are reasons to try and keep the deposit as small as possible, but not so small that the seller doesn't take it seriously. You see, once a buyer and seller agree to terms, the earnest money deposit is usually placed in a "trust" account. At that point it is no longer the buyer's money -- it belongs jointly to the buyer and seller.

Almost all deals close and the earnest money funds are applied to the buyer's down payment and closing costs. As the saying goes, however -- there are exceptions to the rule.

Some sellers think that if the deal falls through, the earnest money deposit is automatically forfeit. Some buyers think that if the deal doesn't close, they automatically get the money back.

Neither one is true.

Even when the failure to close is the buyer's fault, the seller doesn't have a "right" to the deposit as a way to "punish" the buyer. Nor does the buyer automatically get the entire deposit back, even when they are not at fault.

First, there are normally a small amount of cancellation fees that must be paid. These fees are collected from the deposit. Second, since the deposit is held in trust, both the buyer and seller must agree on the disposition of the funds. This is a quirk of law in most states and the real estate agents and their companies have no control over the situation.

If something goes wrong very early in the deal, the seller normally understands and the deposit is usually returned to the buyer without a fuss. When things go awry later in the transaction, both parties usually exercise common sense and negotiate a fair solution. In a few rare occurrences, the buyer and seller find it difficult to agree.

The point is that is always makes sense to reach an agreement. Failure to agree ties the money up for awhile, could possibly lead to further legal action and inconvenience, and it just becomes a frustrating mess for both sides -- more so than you realize at the time.

Serious problems are the exception, not the rule. Most "challenges" are routine to a qualified professional real estate agent. The situation may be new to you, but the agent may have dealt with it many times in the past.

A real estate appraisal is needed to determine the estimated market value of a house, condominium, commercial property, vacant land, etc. It is used to assist someone in making a decision. They may be considering purchasing, selling, insuring, or lending money on a house, condo, commercial property, or vacant lot. Appraisals are also used for tax purposes to estimate how much money a property owner has to pay in taxes.

Here's a summary of some of the services a professional real estate appraiser can provide depending upon their qualifications:

• Residential and Commercial valuation estimates
• Estate planning and estate settlements
• Tax assessment review and advice
• Advice in eminent domain and condemnation property transactions
• Dispute resolution - including divorce, estate settlements, property partition suits, foreclosures, and zoning issues
• Feasibility studies
• Expert witness testimony
• Market rent and trend studies
• Cost/benefit or investment analysis, for example, what will be the financial return of remodeling a house, condo, or commercial property
• Land utilization studies
• Supply and demand studies

Banks and mortgage lenders need appraisals to assist them in figuring out how much money to lend someone for a mortgage loan application. There are many different aspects of a loan application that the banker has to consider, but mortgage lenders always require an appraisal since the real estate will be the collateral for the mortgage loan.

People get very emotional and excited about purchasing a house. When they're in this highly emotional and excited state, they tend to just look at the cosmetic appeal of a house instead of the important factors. They forget that they're not buying a CAR, they're buying a HOUSE!! There's a big difference between the two. One is a normal expense everyone has to incur occasionally. The other is the biggest financial decision most people will ever make. By becoming too emotionally attached to a deal, people often pay above market value for a home. This can cost them tens of thousands of dollars in an overpriced purchase. Since a house is such a major financial decision, it's prudent for them not to take any chances. People should try to eliminate as much risk as possible.

A pre-purchase appraisal will inform people of the true market value of a house. This will enable them to make an educated and intelligent decision on whether or not to purchase the home. They will also know the approximate amount to pay for it.

Pre-sale appraisals are recommended. Before someone puts their house up for sale they should have it appraised to estimate the true market value. This will prevent any last minute holdups because of problems found during the buyers' bank appraisal. Any last minute problems will delay the sale or kill the deal altogether.

Homeowners can hire an appraiser to do a feasibility study to assist them before starting home remodeling and renovation work. The appraiser conducting the study analyzes the condition of the property and the cost of the renovations. The appraiser will then prepare an estimate of what the property's value will be after the improvements are made (the improved value will affect the ad valorem real estate tax). This information will enable the homeowner to not spend too much or too little money with the renovations. The appraiser can also investigate whether a property qualifies for historic preservation benefits from Federal and local governments.

Homeowners can hire an appraiser when they need to insure the value of their home. (This is different than private mortgage insurance PMI). The insurable value is the cost of replacing the property if it were destroyed or damaged. This value can used to underwrite fire and hazard insurance on real estate. Although most reputable insurance brokers can tell you if your fire and hazard coverage is sufficient, there are properties that may require a closer examination, such as, older buildings, custom built homes, or properties with unusual features, such as solar energy collectors. An appraiser can give an opinion of the insurable value of the home by using the Cost Approach for their analysis.

Homeowners can hire an appraiser to dispute the amount of their property taxes. Many people don't realize that they can be over charged for their property tax assessments. Homeowners need to hire an appraiser if they believe their property taxes are too high. An appraiser can estimate the market value of their house and then the homeowner can try to have their property taxes reduced.

Homeowners can hire an appraiser if they need to cancel Private Mortgage Insurance (PMI). New homeowners are frequently required to obtain private mortgage insurance, but as a result of legislation passed by Congress in 1998, homeowners can cancel this coverage when their loan to value ratio reaches 80 percent. An appraiser can estimate the current value of the home which will assist the homeowner in deciding whether or not to ask the lender to drop the PMI.

Relocation firms always need real estate appraisals during the process of employees being transferred to a new location by their employers. Sometimes, the relocation firm or employer will purchase an employee's home if the employee is unable to sell the home during a specified time period. A relocation appraisal is an estimate of the anticipated sales price which a home will sell in the current market within a reasonable length of time. The "length of time" in the appraisal valuation depends on the conditions in the area where the home is located. The definition of anticipated sales price indicates "a reasonable marketing period, not to exceed 120 days and commencing on the date of appraisal (inspection), is allowed for exposure on the open market."

Appraisers are needed during property condemnation proceedings, also known as, Eminent Domain. Appraisers often are asked to estimate "just compensation" in situations where the Federal, State or Local governments take ownership of private property for public use. This happens in situations such as, to build a road, public park, expand an airport, etc. The law requires that owners of the condemned property, (property taken by the government in this manner), must be paid a fair price.

Appraisers are also hired to give an opinion of value of property for gift or inheritance taxes, lease rental schedules, and other investment purposes.

To do real estate appraisals for federally related transactions, there are Federal and State licenses and/or certification requirements in all states. The regulations generally require a new appraiser to work under someone else's wing until they learn the basics of the business and get some training. They also require the new appraiser to take some appraisal classes to teach them the ropes. The appraisal classes can be very interesting and helpful if you have knowledgeable instructors for the courses.

An appraiser listed on the FHA Appraisal Roster/Register is eligible to perform appraisals for FHA-insured mortgage loans. The success of the FHA mortgage insurance program and HUD's ability to protect its financial interest begins with selecting qualified and knowledgeable appraisers.

When and why was the appraisal foundation established? In 1986, the instability in the real estate and mortgage lending professions led nine leading professional appraisal organizations in North America to form the Ad Hoc Committee on Uniform Standards of Professional Appraisal Practice (USPAP). These groups agreed upon a generally accepted set of standards that were then adopted by the eight American appraisal organizations. With the adoption of the Standards, The Appraisal Foundation was established in 1987 to implement the Uniform Standards of Professional Appraisal Practice through an independent board, the Appraisal Standards Board (ASB). The Appraiser Qualifications Board (AQB) was later incorporated in the Foundation structure in order to facilitate the development of meaningful qualification criteria for appraisers.

What public charge does the Foundation have and how was it obtained? In 1989 Congress passed the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), more commonly known as the Savings and Loan Bailout Bill. Title XI of FIRREA set up a real estate appraiser regulatory system involving the Federal government, the States and The Appraisal Foundation. The Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council has the authority to ensure that the States and the Foundation meet the requirements that the States use certifying appraisers and the standards of professional practice to which appraisers are held by the States (the Uniform Standards of Professional Appraisal Practice - USPAP). As a result of the legislation, the Foundation has the following responsibilities: all certified appraisers must meet the qualification criteria established by the Appraiser Qualifications Board (AQB); all State appraisal examinations must be reviewed and approved by the AQB; all appraisals for Federally related transactions must conform to Uniform Standards of Professional Appraisal Practice promulgated by the Appraisal Standards Board.

What is the purpose of The Appraisal Subcommittee (ASC)? The Appraisal Subcommittee mission is to ensure that real estate appraisers, who perform appraisals in real estate transactions that could expose the United States government to financial loss, are sufficiently trained and tested to assure competency and independent judgment according to uniform high professional standards and ethics. The ASC is responsible for monitoring the individual States in the licensing and certification of real property appraisers. In addition, the ASC acts as an oversight mechanism of activities of The Appraisal Foundation relating to real property appraisal. For additional information on the ASC and its activities, please visit the ASC website at www.asc.gov.

What is the relationship between The Appraisal Foundation and the Appraisal Subcommittee (ASC)? These two entities are often confused by the public. The Appraisal Subcommittee is the Federal agency charged with oversight of the State appraisal regulatory programs. In addition, the ASC is responsible for monitoring the activities of The Appraisal Foundation and the ASB and AQB as well as providing a Federal grant to assist in the operations of these Boards.

What is the relationship between The Appraisal Foundation, the Appraisal Standards Board (ASB), and the Appraiser Qualifications Board (AQB)? The Appraisal Foundation serves as an umbrella organization for two independent Boards, the Appraisal Standards Board and the Appraiser Qualifications Board. While these boards are independent, the Board of Trustees of The Appraisal Foundation is responsible for funding the activities of the ASB and AQB as well as appointing members to the Boards and providing oversight of their activities.

How is The Appraisal Foundation funded? The Appraisal Foundation is funded in part by a Federal grant, sales of publications and services and from Sponsoring Organizations.

Is The Appraisal Foundation part of the Federal government? No, The Appraisal Foundation is a private non-profit educational organization.

I hesitate to make a list
Of all the countless deals I've missed;
Bonanzas that were in my grip -
I watched them through my fingers slip;
The windfalls which I Should have bought
were lost because I over-thought;
I thought of this, I thought of that,
I could have sworn I smelled a rat,
And while I thought things over twice,
Another grabbed them at the price,
It seemed I always hesitate,
Then make my mind up much too late,
Avery cautious man am I

And that is why I never buy.

When tracts rose high on
Sixth and Third,
The prices asked I felt absurd;
Whole block-fronts bleak and black with soot-
Were priced at thirty bucks a foot!
I wouldn't even make a bid,
But others did -- yes, others did!
When Tucson was cheap desert land,
I could have had a hip of sand;
When Phoenix was the place to buy,
I thought the climate much too dry!
"Invest in Dallas-That's the spot!"
My sixth sense warned me I should not,
A very prudent man am I

And that is why I never buy.

A corner here, then acres there,
Compounding values year by year,
I chose to think and as I thought,
They bought the deals I should have bought.
The Golden chances I had then
Are lost and will not come again,
Today I can not be enticed
For everything's so overpriced.
The deals of yesterye