Monday, March 2, 2009

Fool Me Once Shame on You, Fool Me Twice, Shame on Me

When we bought our first home in the D.C. area, we muddled through the process, with many misgivings. We were highly reliant on the recommendations and advise of others. Internet searches for things like "closing costs" were incredibly generic, or specific to certain loans or regions. Hell, I didn't even know that realtor commissions were negotiable.

In any case, we learned many lessons from that experience, and hope some of the first-timers will not repeat our mistakes. Many of these items have been discussed on this blog over the last two years, but I wanted to put together a compilation (for easy reference on the side bar), now that we have officially purchased a home for the second time.
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Consider all costs. Don't just look at the sale price of the home, but consider all the money you will spend to make the house what you want (remodeling/repairs etc.). I know this may seem basic to some, but it wasn't something that really occurred to us when we bought our first home. It's also a big reason we bought a new home here in CA, as opposed to a foreclosure. Buying a home that needs tons of repairs or remodeling requires a big chunk of cash or credit. With tighter lending standards and credit, it's more important than ever to make sure you properly account for these costs ahead of time. Having owned a home before, we were able to walk through homes and estimate these costs more accurately. The first time, we relied heavily on an inspector who was recommended by our realtor. It was a huge waste of $400. For example, a couple months after closing we found an exterior wall in our home was rotted due to moist soil against it.

When considering all costs, don't forget to account for taxes, and any homeowner dues. One of the reasons some developments seem so much cheaper than others, the extra fees and taxes. And of course, there are big variations in monthly costs, such as utility bills.

Shop around for homeowners insurance. Some of the quotes we received this time around were 2x higher than the policy we chose. We checked the CA insurance commissioners survey to get a feel for who had lower rates, then went to J.D. Powers to make sure the company was well rated.
The second time round, we were also much more cautious about the people we worked with. The first time, we went with a realtor based on a recommendation, and then used all the services he recommended (appraisers, loan officers, inspectors etc.). While this can be very helpful in some situations, there are also major pitfalls, say if kickback are paid.

Find out what items are negotiable, and what are usual and customary for your area. This applies to both the closing costs and items in the home. It seems in California homes rarely come with a fridge or washer/dryer. Whereas back East, they stay with the home. Window furnishings, hot tubs, etc. all tend to be negotiable.....If you are expecting something to be there when you move in (or not to be there, in one case for us...debris in the yard), make sure it's in the contract (a good realtor should be able to help with this). Closing costs add up quickly, so negotiating those away is always a plus. But in some cases it may be to your advantage to go the other way....for instance we offered to pay for more closing costs, in exchange for price concessions from the bank (which lowers our taxes).

In the hustle and bustle of offer and counteroffer on a home, don't ignore the financing aspects. Pay attention to interest rates, and educate yourself. We didn't fully understand the whole points/origination fee etc., or how brokers made their money. The Mortgage Professor has many good resources on this topic.
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Please feel free to make other suggestions.....this is in no way an exhaustive list. Just what I can think of off the top of my head today.

12 comments:

Curious said...

Look into first time home buyer programs. Sacramento Housing & Redevelopment Agency offers an MCC for qualified buyers that can reduce your Federal tax bill by 20% of the amount of interest you pay.

You must meet income and home price limits, but they can be surprisingly generous. Income can be as high as $99k and home price can be as much as $525k.

http://www.shra.org/Content/Housing/HomeBuyer/HomebuyerTOC.htm

Congrats again on the new home, AB!

Deflationary Jane said...

Looked at those programs and they are of no help to me or anyone I know currently struggling to buy. The programs are restricted by census tracts to areas where no one wants to live. The income limit for two wage earners is 45k. And if you did qualify, investors are buying up anything you could afford.

Forget buyers assistance programs, stop the specuvestors instead because the old ways of bring new buyers in don't seem to working.

Sold in '05 said...

How about using a lawyer during the transaction? When we bought and then sold our house out east, we retained a lawyer to represent us at both closings. The cost was $500 in 2002 for the buy then $700 (including full power of attny) in 2005 for the sale. This seemed like the best value of anything during our transactions. The realtors did NOTHING other than write the contracts and then show up at closing to collect big checks, but the lawyers read and checked EVERY document in the stack, explained each of them and acted in our place to sell the house when we moved out here. Do lawyers in CA do this type of thing or does everyone just trust the title/escrow/realtors?

-CD

patient renter said...

The first time, we relied heavily on an inspector who was recommended by our realtor. It was a huge waste of $400.

It was just that particular inspector who was a waste?

Paul said...

IMO, I think many agents "recommend" inspectors based on the inspector's sole qualification that he/she won't blow the deal. They generally just check off an established list of very basic things and have pages of disclaimer as to the sufficiency of their inspection. I prefer to hire an engineer (for quite a bit more money) and get a thorough inspection.

As all of you know, in CA we tend to use title companies in lieu of lawyers to handle the closings. In the east, it tends to be the opposite based on my experience. Having a lawyer represent you in a real estate transaction in CA, is an excellent idea, but expect to pay some money. IMO, most lawyers would re-write the CAR form contracts (written by agents to protect agents), to try to protect the buyer or seller, depending on who the lawyer represented. And I know from experience that residential agents (and now REO departments), resist non-CAR contracts because it is not familar to them.

Curious said...

Jane,
I do not know what program you looked into but in Sacramento County, a single person can make $71K and buy a house priced up to $429K anywhere in the county. If you buy within a targeted census tract you can make up to $85.2K and purchase a home priced up to $525K.

Sorry that doesn't help you or your friends (and I thought you were an underpaid civil servant!)

But it is a real program that provides real tax benefits for people who qualify. It probably works best for younger people who haven't reached their peak earning potential yet.

AB asked for suggestions to help home buyers, I offered one.

anon1137 said...

Agree w/Paul on the inspector. RE agents only hire/recommend inspectors who "help" the deal get done.

Also, anyone hired through your agent, whether an inspector, appraiser, engineer, repair person, etc. will generally be paying a kickback to that agent and they add the cost of that kickback onto the normal cost of their service, so cut out the middleman and hire experts directly.

G Spot1 said...

I would add: Don't be afraid to ask for what you want and move on if you don't get it. Not only with sellers, but with agents and other professionals you are using.

We had serious problems with our agent, who just did not understand our view (the correct view) of the housing market, and eventually had to fire her. We probably took too long to do it, and if we went through it again, I would pull the trigger much sooner.

As for lawyers, they are almost never used in residential real estate transactions in California. Everyone uses the CAR contracts. Even if they aren't the best, everyone understands them and they provide predictability. I think if you use a lawyer the other side might get uncomfortable, especially if they lawyer is inserting himself a lot into the process. In this market, you can probably get away with that. In a more balanced market, I think the other party will start looking for the exits. Lawyers scare people - especially bad lawyers - because they think they are getting set up for litigation.

Deflationary Jane said...

Curious

Didn't mean to sound harsh but everything I saw as I flipped through the links had the 2 wage cap at 45k

1-person $39,750
2-person $45,450
3-person $51,100
4-person $56,800
5-person $61,350
6-person $65,900

The 1 person would work for me but you are still tied to find a place that will pass FHA guidelines at 3 times your salary. If you do find something, the investards are all over it. Did you see the article on how former CW exs formed Penny Mac and buy all the REOs up? No wonder folks are having a hard time. That's what I was trying to get at.

In other news, a friend called after his quarterly HOA meeting last night. He owns a condo in Mountain View. They now have 9 foreclosures and are going to raise everyone's fees. His neighbor told him it was the last straw. He spend almost half a mill upgrading his place and it's just not worth it to hang on any more.

Buying Time said...

"How about using a lawyer during the transaction?"

If we had bought a foreclosure from a bank, we planned on having a lawyer friend look over their lengthy "addendum", which is rather objectionable. We didn't follow through with negotiations after seeing one.

Regarding inspections, they aren't as important here, as they were in VA, which is a buyer beware state (no disclosure). Speaking of which, there is a big exception, if you are making a serious offer on a bank owned home, you may want to consider doing your inspection before your offer, since you are buying the home as-is. You don't want to put in an offer for X dollars only to find out that the home needs 20K in repairs to be livable.

Curious said...

Jane,

I now see the problem, you were looking at the down payment assistance program and I was looking at the MCC program.

Two different programs with two different sets of income criteria.

Looking further into the SHRA website, it indicates that you can also layer the programs. In non-targeted areas, you can layer up to three different assistance programs, in targeted areas you can layer up to seven programs.

Since I'm not looking at buying, I don't want to spend hours delving into all the available programs or pry into your personal finances. : )

The federal Mortgage Credit Certificate program is an old program and can quite literally save you thousands of dollars in federal income tax over the life of the loan.

I sincerely hope that you are able to find what you are looking for. I am sorry for your friend's situation, it's why I would never buy anything in a condo, PUD, or co-op.

Deflationary Jane said...

Thanks Curious.

I had put in one of my semi-famous lowball offers on a place, which Fannie Mae countered and I walked. It's still for sale after 2 reductions.

In the meantime, I just signed a new lease and am looking at letting someone take over my current lease, with the owner's permission of course.

The deals out there for renters are freaking incredible but you have to be careful. Do all your due dilligence on the owners. I think I was shown a house by a Ukranian mafia member. Oh do I have some potential landlord from hell stories now.