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Author: TMFDj111 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127801  
Subject: Re: First time buyer Date: 3/2/2003 7:02 PM
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I'm a first time buyer getting ready to move into home ownership, and it really feels like I'm jumping into the deep end! I guess I'm just not too sure where to start...mortgage broker, buyer's agent, start looking for houses? It's just a bit overwhelming!

I recommend you make haste slowly. You have almost five months between now and the end of July. That's plenty of time to make informed financial choices and to turn those choices into decisions if you know what you're doing and if you're prepared to commit the time and financial resources to finding your dream home. That's a little bit of a tight schedule if you're truly starting from a dead start. Deciding upon your home probably is the biggest personal financial decision you'll make in your life. You should make that decision reflectively. You may want to THINK about extending your lease a few months to give yourself some breathing room.

Buy or Rent

Buying a house is an emotional investment that has far more to do with lifestyle choices than it does with financial considerations. Potential homeowners should buy residential real estate because they love the neighborhood, they love the lot, they love the house, and they want to make that house a home. If you want to buy a house, absolutely you should buy a house. However, don't accept blindly the conventional wisdom that buying a house is a good financial investment. The first question most people should ask when they think about buying a house is whether they should buy or rent.

Buying residential real estate has drawbacks. Residential real estate is illiquid. Acquisition costs are high. Transaction costs are high. Holding costs are high. On average residential real estate appreciates with inflation. Considering appreciation, mortgage interest tax deductions, maintenance, selling preparation costs, closing costs (both buying and selling), and real estate agents' commissions, property owners must own residential real estate about seven or eight years to have a fighting chance of breaking even on the property. If you consider "making money" on your house critical, you are at substantially higher risk of loss if you will only be in the house three to five years.

In contemporary American society, people change jobs every two or three years, and they change employers every seven or eight years. People are much more mobile than they were when their parents were buying their first homes. Keep in mind owning your own home may reduce your flexibility to accept professionally rewarding, intellectually stimulating, and financially lucrative job offers.

Invariably someone notes a particular region has had above average appreciation of residential real estate for years. If there's above average appreciation in one region, then there's below average appreciation in another region. Additionally, extreme variations ALWAYS regress to the norm, so eventually the bubble will burst, and the region that had above average price appreciation will suddenly become known as the region where homeowners can't get their money out of their properties. Speaking with friends and co-workers, it won't take long to discover examples of people who bought houses in Boston, Washington, Atlanta, Chicago, San Diego, San Francisco, or other can't lose markets and who are trapped in their houses or sold them at substantial loses.

Many people buy houses because they have friends who claim to have made several tens of thousands of dollars on the sale of a house. My personal experience is people who claim to make a lot of money in residential real estate juggle the numbers. They're not being deceitful. They just suffer from selective memories and a lack of the financial rigor most people expect from business analyses. When people report they've owned seven homes in 10 years, and they made money on all of them, klaxons should go off in your head. You might even ask them to show you their numbers and calculations.

On the other hand, there is a lot to be said for owning your own home. Only under the most extraordinary and protracted circumstances can you be forced to leave your home. You can put as many 16-penny nails as you like into any walls you like. You can paint the place Pepto-Bismol pink with florescent lime green stripes and eggplant purple polka-dots if you want. You don't have to worry about the landlord raising the rent.

Renting is not necessarily a panacea. The services landlords provide and the quality of those services varies widely. In my experience, available rental properties tend to be smaller than available sale properties, although when I compare notes with friends and business associates, I discover my experiences are not generally true. Often single family dwellings available for rent are available for rent because their owners couldn't sell them for their asking prices. Consequently, their owners are absentee landlords who want to put a minimum of time and money into their properties until the day comes when they can unload them, and they may unload them at a time that's inconvenient for tenants.

The biggest advantage of renting is after an initial term (usually one year for most areas of the country) you can walk away from the rental at a cost of two or three months' rent at most. If you're a decent sort and you cultivated a good, business relationship with your landlord, you probably can walk away from the rental at a cost of a few weeks' notice. Additionally, if you're a decent sort, there's an excellent chance your landlord will inform you of his or her sales plans, give you a right of first refusal against any purchase offers, and schedule closings around your needs.

The bottom line is buying your own home is far more an emotional decision than it is a financial decision. However, you should consider the possibility that you may have to live in the house a long time before you can afford to sell it.

Rules of Thumb

There are two rules of thumb buyers should consider before they look for their dream houses. Buyers should apply both rules. No fair just picking the one rule that gives you the answer you want to get and ignoring the other rule.

The first rule is the selling price of their houses should be less than three times annual gross income. Buyers who violate this rule probably will discover their neighbors are more affluent than they are, and they'll have difficulties maintaining their homes and lifestyles to the standards of their neighborhoods.

The second rule is buyers' housing expenses (principal, interest, taxes, insurance, utilities, and maintenance) should be less than 1/3 of their annual gross incomes. Buyers who violate this rule probably will discover they have to struggle to pay their bills each month.

There are so many programs to turn renters into homeowners that it's easy to ignore the rules. Buyers justify their housing purchases by noting the rules don't apply to their situation, the real estate market or economic environment present an unusual buying opportunity, claiming they'll grow into the more costly house, or that a big promotion is due that will keep them within the rules. Once they're on the slippery slope, it's hard to get off. I recommend erring on the side of caution. It's much easier to trade up leisurely when fortune smiles upon you than it is to trade down in a panic to avoid bankruptcy.

There always will be people who counsel to "buy as much house as you can afford," or to "let inflation take care of your mortgage," or "the mortgage company won't let you get into real trouble," or "if you wait to save $1 housing prices will increase $1.50." Those solutions may be acceptable for those people, but those solutions are not solutions buyers generally should adopt.

I think when it comes to houses, "less is more." For example, buying a house with a selling price that's 2 or 2-1/2 times your annual gross income will leave more money for investing, saving, and spending. Since many divorces have their roots in financial difficulties, buyers may even discover less expensive houses lead to more meaningful marriages.

Remember heuristics apply to most of the people most of the time. You may have special circumstances that suggest the rules don't apply to your situation. The example that springs to mind is potential buyers who are recipients of windfalls (e.g., unusually good fortune in the stock market, inheritances, or lottery winnings) may want to commit some of their winnings to more house than they might otherwise. But these buyers also should reserve sufficient funds from their windfalls to operate and maintain their homes. For example, if windfall recipients want to have $10,000 per year available to operate and maintain a house, at a 4% withdrawal rate they would need to reserve $250,000. On the other hand, many people get into trouble when they ignore rules of thumb.

Some Background References

Once you make the decision to buy your home, I recommend reading through the articles at TMF's Home Center. The information there is solid, and you already paid for it. You can jump to the Home Center from this link:
http://www.fool.com/homecenter/

Home Buying for Dummies is worth scanning. You can borrow a copy at your local library, or buy a copy at Amazon.com, Buy.com, or your local bookstore. While I despise the titles of the Dummies and Idiots series of books, the information within them usually is good, and there seems to be wide agreement on TMF's Buying or Selling a Home discussion board that the Home Buying book is helpful.

The U.S. Department of Housing and Urban Development has an extensive library of informative brochures and web pages available on their web site:
http://www.hud.gov/

TMF's Credit Center has information on how mortgage companies evaluate applicants' credit-worthiness. You can jump there from this link:
http://www.fool.com/ccc/

Fannie Mae (FNMA) and the National Endowment for Financial Education jointly produced a guide, "Knowing and Understanding Your Credit," with excellent information, and they have other brochures of interest to potential home buyers. You can get copies at this link:
http://www.homebuyingguide.org/

This article from the Federal Trade Commission describes your rights under the Fair Credit Reporting Act. It takes a minute or two for the document to load -- be patient:
http://www.ftc.gov/bcp/conline/pubs/credit/fcra.pdf

This article from the Federal Consumer Information Center describes how to dispute inaccurate information in your credit report:
http://www.pueblo.gsa.gov/cic_text/money/credit-errors/crediter.htm

And this article from Bankrate.com describes how to close a credit card account (sometimes called a revolving charge account) in a way that will reflect well on your credit-worthiness:
http://www.bankrate.com/brm/news/dollardiva/20010604a.asp

The FAQ for the Buying or Selling a Home discussion board is a good source of referrals to TMF posts. You can get there by opening any post on the Buying or Selling a Home discussion board, and then clicking on the link to the FAQ (which should be in the column on the right-hand side of the page). As of January 2003, this is the link:
http://boards.fool.com/Message.asp?mid=16650331

I also recommend surfing over to Homegain.com. Homegain is a recruitment site for customers seeking the services of retail real estate agents, but they have a lot of good information. I'm especially fond of the information at their "Find a Realtor" link. You can get more information from this link:
http://www.homegain.com/

There are at least five real estate discussion boards on TMF --

Buying or Selling a Home
http://boards.fool.com/Messages.asp?bid=100144

Real Estate
http://boards.fool.com/Messages.asp?bid=100061

Real Estate Investing
http://boards.fool.com/Messages.asp?bid=113590

Real Estate & REITs
http://boards.fool.com/Messages.asp?bid=100061

Building / Maintaining a Home
http://boards.fool.com/Messages.asp?bid=100167

Buyers who are thinking of residential real estate as an investment may also want to read these articles:
http://www.fool.com/imo/2002/a020102.htm
http://www.forbes.com/forbes/2002/0610/228.html

Mortgages

A mortgage is a way to get a house when you don't have the cash to buy it outright. A mortgage is not a rite of passage, nor is it a keystone to reducing your income tax burden. While it's true taxpayers can deduct mortgage interest on your federal income tax returns, it's also true they're spending interest dollars to save deduction pennies. Additionally, buyers who pay cash for a house will save (cost avoid) about 3% on the final closing price because many closing costs are tied one way or another to the mortgage process. 3% may not sound like much, but on a $200,000 house, 3% is $6,000 -- that's a lot of dinners and movies.

Bankrate.com offers current interest rates on a number of financial products, including mortgages. You can get more information from this link:
http://www.bankrate.com/

When you apply for a mortgage, the clerk helping you through the application process probably will give you a copy of your credit report (at no charge) and explain the report to you. If you want to see a copy of your credit report before you apply for a mortgage, I recommend you look at the reports available from TMF's Credit Center. There are many companies offering "free" credit reports over the internet. Unfortunately, you'll discover when you register for your free credit report, you also register for some sort of subscription service -- the exact service depends on the web site. That subscription service will charge a monthly or quarterly fee, and unsubscribing from the service is time-intensive. Some credit reporting services will sell you a copy of your credit report for a fee, but then the report they provide you is unintelligible. Save yourself some aggravation and get a copy of your credit report from TMF's Credit Center.

One of the frequent posters on TMF's Buying or Selling a Home discussion board recommends How to Save Thousands on Your Home Mortgage by Randy Johnson. You can borrow a copy at your local library, or buy a copy at Amazon.com, Buy.com, or your local bookstore. There appears to be a lot of solid information in this book, but there also appears to be a lot of unsubstantiated opinion. On the other hand, the book is in its second edition, which usually is good news.

Another resource you may want to check is the Mortgage Professor web site. The site has informative FAQs and calculators. You can jump there from this link:
http://www.mtgprofessor.com/

Information about guaranteed home loan programs are available from these two web sites:

U.S. Department of Veterans Affairs
http://www.homeloans.va.gov/

FHA Mortgage Insurance Program
http://www.hud.gov/buying/insured.cfm

Credit scores typically are reported as "FICO Scores." FICO is an acronym for Fair, Isaac & Company, which provides client companies with "financial services decision-making solutions." You may want to spend a few minutes prowling through the Fair, Issac & Company web site:
http://168.230.129.57/servlet/SiteDriver/Content/1874

Buried deep in the Fair, Isaac web site is a chart showing the distribution of scores among the general population. To get to that chart, go to this web site and click on the "How do People Score?" link (near the top of the page on the right-hand side):
http://168.230.129.57/servlet/SiteDriver/Content/1811

It's helpful to talk to the mortgage people before you look for a home. They can tell you about special mortgage programs for which you may qualify and how much mortgage they're willing to consider for you. They can tell you about problems with your credit report that may have escaped your notice. They can provide qualification or commitment letters that can be helpful when making a purchase offer in a sellers' market. Plus talking to them early helps to establish a business relationship that can be helpful after a seller accepts your purchase offer and you're trying to get to closing.

When you're ready for a mortgage, you should check with whichever bank, savings bank, or credit union you already do business; you should check with whichever business your real estate agent suggests; but you also should check your yellow pages for "mortgage brokers." Mortgage brokers have professional relationships with many mortgage companies. They match buyers' needs with mortgage companies' financial products, and the mortgage companies pay them a fee when they deliver a customer. Some people love mortgage brokers. Some people hate them. These posts have more information:
http://boards.fool.com/Message.asp?mid=18139915
http://boards.fool.com/Message.asp?mid=16236511
http://boards.fool.com/Message.asp?mid=14983721

My personal experience is I get the best deals when I deal with organizations with which I already have business relationships. Negotiating a deal over a Coke and a plate of cookies is pleasant and lucrative. Because the people involved in the transaction know me, things tend to go right. When things go wrong, I can telephone somebody with whom I already have an established business relationship and ask him or her to fix the problem. When things go really wrong, I know where I can go to grab somebody by the lapels and shake vigorously until I feel better.

I've never dealt with any of the web-based mortgage companies. The consensus on TMF's Buying or Selling a Home discussion board seems to be to avoid them. The web-based mortgage companies have cute TV commercials, but the people you deal with when you work with these companies companies are low tenure, minimum wage workers. Their proficiency is poor, and there's not an effective way to complain to management. Additionally, the business model for the web-based mortgage companies includes a lot of queries into your credit reports, which makes it hard for buyers to compare various mortgage companies. (Multiple queries over a short time drive down credit scores because one of the symptoms of financial difficulties is multiple credit queries as increasingly desperate individuals seek credit lines from increasingly questionable sources.)

Strictly speaking, a conventional mortgage is any mortgage that does not have a VA or FHA loan guarantee. However, most people think of conventional mortgages as mortgages in which buyers put down 20% of the selling price of the house and finance the balance. When talking about "conventional mortgages," ensure all parties are using the same terms to mean the same things.

Lenders require buyers who put down less than 20% of the selling price of the house (in non-VA and non-FHA mortgages) to purchase Private Mortgage Insurance (PMI). PMI compensates lenders if and when buyers default on their loans, and it costs 1% to 2% of the mortgage payment each month. There are ways to avoid PMI, and there also are ways to drop PMI once homeowners achieve 20% equity in their homes.

The Federal Reserve Bank of San Francisco offers extensive consumer information about PMI, including how to avoid it and how to exterminate it once you're infested. You can get more information from this link:
http://www.frbsf.org/publications/consumer/pmi.html

Real Estate Agents

What you should expect from real estate agents is expediency. There's very little a real estate agent can do for you that you can't do for yourself. What the real estate agents offer is to do it faster, with fewer blind alleys, and more conveniently (for you). The selling price of a house typically includes about 6% commissions for real estate agents. If you're not receiving services you value at several thousand dollars, then you need to speak with your agent or find a new one.

In the world of real estate agents, sellers' agents (or listing agents) represent the sellers, buyers' agents represent the buyers, and dual agents represent both buyers and sellers (in the same transaction) simultaneously. In the old days, real estate agents typically represented both parties in the transaction. However, there were abuses in the system, and 15 or 20 years ago the real estate world started moving towards a system of sellers' agents and buyers' agents.

If you're a first-time home buyer, you probably should prefer to have a buyer's agent. The way the game is played, the seller contracts with a seller's agent for a number of services, and in return the seller's agent receives a commission -- typically 6%. The buyer contracts with a buyer's agent for a number of services, and in return the buyer's agent splits the commission with the seller's agent -- typically 3% for seller's agent and 3% for buyer's agent. (Actually the commissions go to the agents' firms, but that's a minor detail.)

Agents' commissions work oddly. You have to read the terms of your particular contract, but typically the commissions come off the selling price. For example, if you contract to buy a house for $100,000, you'll write a check for $100,000, the seller will get $94,000, and the agents will split $6,000. Of course in real transactions there are closing costs and fees to pay, so the numbers in a real transaction will be different. You'll probaly write a check for about $103,000, and the extra $3,000 will go to closing costs and fees.

The effect is the price of the agents' commissions is rolled into the price of the house. The buyer does NOT write a separate check for the buyer's agent's commission. Buying a house is not like buying art at an auction -- but read the terms of your particular contract to be absolutely certain.

This separate seller's agent and buyer's agent thing sounds wonderful in theory. The buyer's agent has a fiduciary duty to the buyer, and the buyer can enforce the financial consequences of that duty with legal procedures. However, in practice the two agents communicate a lot of information back and forth. There's both opportunity and motivation for hanky-panky.

You want to tell your buyer's agent about your requirements. For example, "I want a 2,400 square foot house, three bedrooms, three bathrooms, three-car garage, in the XYZ school district. I want it well maintained (no handyman's specials). I want to move in by the end of August." I WOULD tell my buyer's agent about reservations I have about a house. For example, "the master suite is smaller than I would like, the floor plan is quirky, and the house looks like it hasn't been maintained," or I would complain about the lethargy the seller or seller's agent is showing and ask whether it's time to look at other properties with motivated sellers and professional sellers' agents.

On the other hand, I would NEVER, EVER, EVER say anything to a buyer's agent that I wasn't prepared to say directly to the seller. For example, I would NOT tell my buyer's agent, "I'll bid $150,000 for a house, but I'm willing to go to $180,000," and I would NOT tell my buyer's agent that I have to have a house by the end of August or my world will come to a crashing halt.

If you're an experienced home buyer, you can work with a dual agent. The more people involved in the transaction, the more opportunities there are for problems. IF YOU KNOW WHAT YOU'RE DOING, you can eliminate one of the agents, and potentially you can negotiate a selling price that excludes the cost of the buyer's agent's commission. I emphasize you should only work with dual agents if you know what you're doing.

Opinions vary on how to select real estate agents. There's no doubt in my mind that the best way to find candidates is the same way you find other professionals -- ask for referrals from family members, friends, and business associates. You should get a roster of agents you prefer, and a second roster of agents you prefer to avoid. If you don't have referrals, then you should interview a lot of agents, and get references from them. Call the references to confirm the former clients really are happy with the agent's performance.

You may want to refer to the National Association of Exclusive Buyers Agents for information. While it's significant that there's an organization of exclusive buyers' agents, I still would use all the standard techniques to find an agent. For example, get references, make sure the agent has at least five years full-time experience in my neighborhood and price range, test drive the agent before signing agreements, etc. Even then, I would insist the agent earn my trust, rather than depending on the professional organization to provide trustworthy agents. You can get more information from this link:
http://www.naeba.org/

To figure which candidates you want to consider, I think the minimum criteria for real estate agents should be at least five years of full-time experience in the neighborhood and price range of interest. Most entry-level real estate agents will become business failures, and five years full-time experience seems to be long enough to weed out the failures. Avoid agents who are working part-time because they're hobbyists, dilettantes, or supplementing their retirement income. Also avoid agents with impending family crises; e.g., impending death in the family, impending hospitalization, impending marriage (their own or a child's), etc. Agents with experience in your neighborhood and price range are best able to help you find houses that meet your requirements.

I recommend you "test drive" the agent before you sign any representation agreements. Ask the agent to spend a half-day or a day showing you properties in which you might be interested. If the chemistry is right between you, your mate, and your agent, then you can sign an agreement. If you happen to stumble across your dream house during the test drive, the agent will insist you sign a representation agreement before he or she helps you to prepare a purchase offer. If the agent resists your taking him or her on a test drive, then look elsewhere.

When you sign an agreement with an agent, he or she will want to make the agreement expansive, and you'll want to make it narrow. When I was young and stupid, I signed an agreement that was for any property anywhere on the planet (I exaggerate only a little) with a six month term. More recently, I signed an agreement that was for one specific property for a two week term.

It's perfectly acceptable to insist on an agreement for a relatively small geographic area (e.g., the northwest quadrant of the city, within the boundaries of the XYZ school district, or within Green Acres Estates) and for a relatively short term (e.g., a month or two). If the agent is meeting or exceeding your expectations, you can expand the agreement or extend the term. If you don't care to continue business with this agent, it's much easier to do business with another agent outside the bounds of the first agent's agreement than it is to fire the first agent.

Having multiple agents for multiple areas is common. For example, you might have one agent helping you look for urban properties near the university, and a second agent looking for rural properties in horse country. Most agents specialize in a particular geographic area and a particular type of property. I know one agent who describes herself as specializing in "unusual architecture," and she's introduced me to some properties I certainly agree are unique. You don't want to find yourself paying the agent's learning curve to develop expertise in a new area.

Usually -- but not always -- agents at open houses are junior agents in their firms. You should attend a lot of open houses to see how the agents there conduct themselves. You can learn a lot about any business by observing how the newest members of the firm conduct themselves when the boss is away. However also keep in mind you're talking to low-tenure agents. If you want agents with more knowledge or proficiency, then you'll have to speak with higher tenure agents.

All real estate agents are (supposed to be) licensed as real estate agents by the appropriate licensing authority in the state in which they are doing business. You can confirm that your agent is licensed by telephoning your state's real estate licensing board. You can get their telephone number from your state's web site -- http://www.state.XX.us, where XX is the two-letter postal code for your state. You should check with your state's real estate licensing agency to see whether the brokerage or agent has a record of disciplinary action. The real estate industry does a horrible job of enforcing its own professional standards, so failing to find a record of disciplinary action doesn't mean much, and finding a record of disciplinary action means really bad news.

Some real estate agents are members of their local Real Estate Boards. These agents are called realtors -- they usually have a big, bold "R" following their names on business cards. Realtors are still real estate agents, but the additional effort to become realtors shows some dedication to the profession. You can get more information from this web site:
http://www.realtor.com/

Some real estate agents earn CRS (Council of Residential Specialists) and GRI (Graduate Realtor Institute) credentials. Some agents will tell you the CRS is like a masters degree in real estate and the GRI is like a professional degree in real estate, but these credentials are marketing credentials. People disagree with me, but I think their value is to the real estate agents' ability to market properties, close deals, and possibly to sellers. I don't think these credentials represent any real value to buyers. You can get more information about these credentials from these web sites:
http://www.crs.com/
http://www.grinetwork.org/

Just to complete the hierarchy, real estate agents (and realtors) work for brokers. If you have problems with your agent, you should try to resolve them with the agent. If you can't resolve the problems TO YOUR SATISFACTION, then you should see the agent's boss -- the broker. If the broker can't resolve the problems to your satisfaction, then you need to fire your current brokerage and find a new brokerage and a new agent.

Comparative Cost of Living Across the Country

You may want to look at Coldwell-Banker's Home Price Comparison Index. You can use the index to get a feel for relative costs of houses between cities. For example, a $120,000 house in Minot, North Dakota would cost $1,200,000 in Palo Alto, California.

You can get there by going to Coldwell-Banker's home page:
http://www.coldwellbanker.com/
=> Click on Homeowner
=> Click on Resource Center
=> Click on Home Price Comparison Index

Neither the Department of Labor, nor the U.S. Census Bureau maintain comparative cost of living information versus locality. They do maintain comparative cost of living national averages versus time.

The American Chamber of Commerce has a database of comparative cost of living information, sorted by metropolitan areas. The Chamber breaks down their data into several consumer categories, and they also provide a composite category. The bad news is obtaining the report costs $5 for the first city pair plus $2 for each additional city pair, payable by credit card. There are about a dozen sample reports on the site so you can see what you're going to get for your money. This data is the most widely accepted cost of living data available. You can get more information from this link:
http://www.accra.org/

Homefair.com is a customer recruitment service for relocation retailers (moving companies, real estate agents, etc). Homefair has cost of living data for about 300 metropolitan areas, compared to a U.S. national average cost of living index of 100. You can get more information from this link:
http://www.homefair.com/

Property Appraisals

I recommend attending a lot of open houses to see what's available in your market and at what price. I'm constantly amazed at the wide variations in construction quality, maintenance, and price. Variations are widest from neighborhood to neighborhood, but there are variations even from house to house on the same street. The more open houses you see, and the more neighborhoods in which you see them, the better you'll be able to judge the value of a house yourself and make informed buying decisions for yourself and your family.

Open houses tend to focus on the lower and middle segments of residential real estate markets. If you seek houses in upper segments (e.g., supra-million dollar houses), unusual properties (e.g., horse property or home-office combinations), or custom-built houses, then you'll have to read your particular environment and gain access to those kinds of houses some other way. I've discovered increasingly builders and architects in larger metropolitan markets sponsor annual "parades of homes," and real estate agents are always available to show you properties meeting your requirements.

I've discovered new construction delivers for a 10 to 25% premium to similar second-hand houses. I've also discovered new, architect-supervised construction delivers for about a 25% premium to similar production or semi-custom, new construction.

Some people will tell you to depend on an independent appraisal to determine the value of a house, but I don't buy that story. Appraising houses is an occupation, but it's not a profession, and appraisers tend to value houses at whatever value they're told to find. The federal government is forcing states to crack down on real estate appraisers, but we're not there yet. When states have trouble enforcing their drunk driving laws, it's hard to imagine they have uncommitted resources to devote to enforcing their real estate appraisal rules. Mortgage companies need appraisal reports so they can re-sell their mortgages to investors. You can consider appraisal reports in your buying decisions, but I think they're close to worthless.

The U.S. Department of Housing and Urban Development offers an informative web page on real estate appraisers:
http://www.hud.gov/groups/appraisers.cfm

I find a more reliable source of appraisal information is county property appraisal records, but you must understand how your county appraises residential real estate before you rely on county records. Typically, the county appraises real estate based on records reviews. If property owners feel the appraisals are too high, they may challenge the reviews. Consequently, the county appraisal records tend to be at least in the right ballpark. However, some counties deliberately appraise real estate at some fraction of its true value (e.g., 85%) to avoid the expense of defending challenges, and the appraisal cycles tend to be long (e.g., every other year or every third year). Again, you need to understand the rules for your county before you depend on county records.

Not all states list property information in public records. Kansas, New Mexico, Texas, Utah, and Wyoming are non-disclosure states. To get information about houses in these states (selling price, annual property taxes, etc), you'll have to ask the homeowner, or hire someone with access to a proprietary database (e.g., a house appraiser or real estate agent). Sometimes, some individual counties in non-disclosure states list property information in public records.

Problem Construction

Prior to signing a purchase agreement for new construction, you may want to consult Homeowners Against Deficient Dwellings (HADD). You can get more information from this web site:
http://www.hadd.com/

HADD offers an informative brochure about house warranties (that many builders offer on new construction). You can get more information from this link:
http://www.hadd.com/warranty.pdf

Closing

When you get to the point that a seller accepts your purchase offer, the next thing you'll have to worry about is closing costs. Closing costs vary from region to region. They tend to be higher in high tax states and lower in areas where people do business with a smile and a handshake. Many years ago I was looking at a house in New York, and I'm fairly certain the entire membership of the New York Bar Association planned to attend the closing and to charge me $100 per person for the benefit of their participation. More recently I was looking at a house in New Mexico, and the custom there is for the seller to pay to have the septic tank pumped and the drinking water tested before closing. As a really rough rule of thumb, closing costs generally run about 6% of the selling cost, split more or less evenly between buyer and seller, AND THEY ARE IN ADDITION TO THE SELLING PRICE OF THE PROPERTY.

If you have questions about closing costs, including a link to a survey of specific charges, see this article:
http://www.bankrate.com/brm/news/mtg/20010621a.asp

Folks who are approaching Closing Day may want to review this article at Bankrate.com:
http://www.bankrate.com/brm/news/special/20010817a.asp

The U.S. Department of Housing and Urban Development offers an informative web page on the Real Estate Settlement Procedures Act (RESPA):
http://www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm

The closing process often is difficult. Buyer and seller arrive at the closing meeting, only to discover some vital milestone event hasn't been completed. The sellers watched their moving van go down the street the day before, they've got their car packed, and they're ready to travel to their new home. The buyers have everything they own in the U-Move-It van parked in the lot outside. Agents are pointing fingers at each other. Spouses are mad at each other. Kids are crying. Dogs are barking. Suddenly all parties are wondering whether they should reschedule the closing meeting, convert the purchase agreement to rent to own agreement, void the purchase agreement and relist the property, or some other choice.

If real estate agents are involved in the sale, among the services they're supposed to provide is ensuring milestone events take place to enable smooth closings. However, buyers and sellers both need to ensure their agents do the jobs they're paid to do.

Additionally, buyers and sellers both should prepare contingency plans in case the closing is delayed. Reasonable contingency plans include arranging with friends or hotels for a place to stay in case the closing is delayed a few days, and planning options if the closing is delayed a month or more. Sellers may want to ask their agents to prepare a roster of second-choice buyers who may want to re-enter negotiations if the preferred buyer can't close on the sale.

"Quality" Houses

Into the realm of very personal opinion, you may want to consider houses that conform to one or more of the following programs.

The U.S. Department of Energy's Building America program - Houses that conform to Building America standards are designed to be more energy efficient and have lower operating costs. In my experience, builders who construct houses conforming to the Building America program warrant utility costs for a year or two after delivery. My experience suggests houses that are Building America compliant are also Energystar compliant, but I've not seen documentation to confirm that my observations are generally true. You can get more information from this web site:
http://www.eren.doe.gov/buildings/building_america/

The American Lung Association's Health House program - Houses that conform to the Health House program are designed to have better internal environmental characteristics. You can get more information from this web site:
http://www.healthhouse.org/

The U.S. Department of Energy and U.S. Environmental Protection Agency's Energystar program - Houses that conform to the Energystar program have energy efficient appliances and accessories installed. The Energystar program is less comprehensive than the Building America program. You can get more information from this web site:
http://www.energystar.gov/

Building a higher quality house costs about as much as building a lower quality house. The differences are mostly in design. For one example of one firm specializing in affordable housing meeting all three programs, see Artistic Homes. I've toured their entry-level Artistic Homes and their mid-level Rembrandt Homes, and I've come away very impressed. For more information, see this web site:
http://www.artistichomes.com/

Unusual Requirements

Continuing with the very personal opinion theme, some buyers may want to satisfy unusual requirements. Most bookstores have architectural and home improvement sections, and there are many good books available addressing a variety of topics.

Among my prized possessions is a copy of Davis, Hal and Sarah Flanagan, The Roadside Guide to American Houses: A Traveler's Guide to Home styles. The privately-published pamphlet contains sketches and descriptions of about a hundred different house styles. It's a helpful pamphlet to have to describe your architectural requirements or to figure out how to describe the "funky house down the street." You can arrange to purchase a copy by contacting Hal Davis or Sarah Flanagan at:
http://www.sugartreeinn.com/

Buyers interested in adobe abodes may want to visit this site:
http://www.adobebuilder.com/

Buyers interested in domed houses may want to visit:
Monolithic Dome Institute
http://www.monolithic.com/

Timberline Geodesic Domes
http://domehome.com/

Buyers interested in solar energy may want to visit The American Solar Energy Society:
http://www.ases.org/

Buyers interested in environmentally sustainable home construction may want to visit the United States Green Building Council:
http://www.usgbc.org/

Buyers with specific questions about insulation may find this U.S. Department of Energy web site informative:
http://www.ornl.gov/roofs+walls/insulation/ins_03.html

Trade Skills

Concluding the very personal opinion theme, some buyers may want to know more about trade skills. The more buyers know about trade skills, the more informed consumers they will be. Many construction trade skills aren't particularly difficult, but they do take time and experience to master.

Home centers frequently offer complimentary or low-cost classes and workshops. Topics range from home repair skills, to concrete work, to specialty finishes. These classes can easily enable buyers to talk to tradespeople and tackle tasks they might otherwise contract. You can get more information about these classes and workshops from links like these:
http://www.homedepot.com/
http://www.lowes.com/

Buyers may also consider investing time in their communities by volunteering to help with a Habitat for Humanity project. Their communities will benefit from their labor, and they'll benefit by discussing construction problems with skilled tradespeople, practicing their own construction skills, and developing friendships with like-minded volunteers. You can get more information from this link:
http://www.habitat.org/

Finally, here's a link to a commercial service that offers to help homeowners with home maintenance and minor home improvement projects:
http://www.casehandyman.com/

Closing Thoughts

I offer three thoughts I've accumulated over the years --

First, always put time limits on your purchase offers. I include a clause that the offer expires at 5:00 pm the next business day (e.g., "This offer expires on Monday, 27 January 2003, 5:00 pm.") If the sellers need more time, they'll ask for it, and then the buyers can generously grant their request. Buyers need to put time limits on their offers because the logistics of rescinding an offer are too complicated to be effective. If buyers don't put time limits on their offers, then sellers can dilly-dally until the buyers are ready to kill someone or have a good cry. Some people advise putting clauses in the offer that it expires upon presentation, but I think that's too short a time. Sellers need time to consider offers, just like buyers need time to think about their offers. Plus clauses that expire upon presentation have a "take it or leave it" tone that I find offensive.

Second, always include a clause in your offer that purchase is contingent on your receiving an acceptable report from a certified house inspector. Some sellers will refuse to accept offers with these types of contingency clauses, but that's their problem. You wouldn't believe some of the junk that's on the market, and you don't want to find yourself contractually obligated to buy a house that has a poor inspection report. You should have an inspector look at new construction as well as existing houses. You'd be surprised what county building inspectors will approve, and you'd be even more surprised how weak most home warranties are in the real world. A few hundred dollars for a house inspection is dirt-cheap insurance that you have information with which to make informed decisions. Some people will argue with me, but I think the minimum acceptable credentials for home inspectors is that they are full members of the American Society of Home Inspectors. You can get more information from this link:
http://www.ashi.com/

Third, the settlement agent is a too often neglected, but crucial participant in the real estate transaction. Take time to find a good settlement agent. When things go right, any settlement agent can do the job reasonably well. But in residential real estate transactions, nothing ever goes right. When things start to turn sour, good settlement agents make squabbling children stop throwing sand in each others eyes, and good settlement agents can sometimes even get the children to share their toys and play nicely together. Get referrals and find a good settlement agent.

David Jacobs
TMFDj111
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