Ray Brown

Article / Updated 07-12-2023

Copyright © 2016 Eric Tyson and Ray Brown. All rights reserved. When choosing between an adjustable-rate mortgage and a fixed-rate mortgage, many people don't realize that they're making a choice between mortgages on which the interest rate is determined by either short-term or long-term interest rates. What's a short-term versus a long-term interest rate? Glad you asked. When a mortgage lender quotes an interest rate for a particular type of loan, he should specify (in terms of how many years until the loan is completely paid off) the length of the loan. Most of the time, borrowers must pay a higher interest rate to borrow money for a longer period of time. Conversely, borrowers generally pay a lower rate of interest for shorter-term loans. So? Well, the interest rates that are used to determine most adjustable-rate mortgages are short-term interest rates, whereas fixed-rate mortgage interest rates are dictated by long-term interest rates. During most time periods, longer-term interest rates are higher than shorter-term rates because of the greater risk the lender accepts in committing to a longer-term rate. It stands to reason, therefore, that when little difference exists in the market level of short-term and long-term interest rates, the rates of fixed-rate mortgages shouldn't be all that different from the rates of adjustable-rate mortgages. Thus, adjustables appear less attractive, and fixed-rate mortgages appear more alluring. On the other hand, when short-term interest rates are significantly lower than long-term interest rates, adjustable-rate mortgages should be available at rates a good deal lower than the rates for fixed-rate loans. All things being equal, adjustables appear more attractive during such time periods and save you more money during the early years of your loan.

Article / Updated 07-10-2023

Nearly everyone seems to have an opinion about buying a home. People in the real estate business — including agents, lenders, property inspectors, and other related people — endorse homeownership. Of course, why wouldn’t they? Their livelihoods depend upon it! Therein lies one fundamental problem of nearly all home buying books written by people who have a vested interest in convincing their readers to buy a home. Homeownership isn’t for everyone. One of the objectives here is to help you determine whether home buying is right for you. Advantages of home ownership Most people should eventually buy homes, but not everyone and not at every point in their lives. To decide whether now’s the time for you to buy, consider the advantages of buying and whether they apply to you. Owning should be less expensive than renting You probably didn’t appreciate it growing up, but in addition to the diaper changes, patience during potty training, help with homework, bandaging of bruised knees, and countless meals, your folks made sure that you had a roof over your head. Most people take shelter for granted, unless you don’t have it or are confronted for the first time with paying for it ourselves. Remember your first apartment when you graduated from college or when your folks finally booted you out? That place probably made you appreciate the good deal you had before — even those cramped college dormitories may have seemed more attractive! But even if you pay several hundred to a thousand dollars or more per month in rent, that expense may not seem so steep if you happen to peek at a home for sale. In most parts of the United States, we’re talking about a big number — $150,000, $225,000, $350,000, or more for the sticker price. (Of course, if you’re a higher-income earner, you may think that you can’t find a habitable place to live for less than a half-million dollars, especially if you live in costly places such as New York City, Boston, Chicago, Los Angeles, or San Francisco.) Here’s a guideline that may change the way you view your seemingly cheap monthly rent. To figure out the price of a home you could buy for approximately the same monthly cost as your current rent, simply do the following calculation: Take your monthly rent and multiply by 200, and you come up with the purchase price of a home. $ _________ per month × 200 = $ _________ Example: $ 1,000 × 200 = $200,000 So, in the preceding example, if you were paying rent of $1,000 per month, you would pay approximately the same amount per month to own a $200,000 home (factoring in modest tax savings). Now your monthly rent doesn’t sound quite so cheap compared with the cost of buying a home, does it? Even more important than the cost today of buying versus renting is the cost in the future. As a renter, your rent is fully exposed to increases in the cost of living, also known as inflation. A reasonable expectation for annual increases in your rent is 4 percent per year. The image below shows what happens to a $1,000 monthly rent at just 4 percent annual rental inflation. When you’re in your 20s or 30s, you may not be thinking or caring about your golden years, but look what happens to your rent over the decades ahead with just modest inflation! Then remember that paying $1,000 rent per month now is the equivalent of buying a home for $200,000. Well, in 40 years, with 4 percent inflation per year, your $1,000-per-month rent will balloon to $4,800 per month. That’s like buying a house for $960,000! The example reflects $1,000 for rent to show you what happens to that rent with a modest 4 percent annual rate of inflation. To see what may happen to your current rent at that rate of inflation (as well as at a slightly higher one), simply complete the table below. Figuring Future Rent Your Current Monthly Rent Multiplication Factor to Determine Rent in Future Years at 4 Percent Annual Inflation Rate Projected Future Rent $__________ × 1.48 = $___________ in 10 years $__________ × 2.19 = $___________ in 20 years $__________ × 3.24 = $___________ in 30 years $__________ × 4.80 = $___________ in 40 years $__________ × 7.11 = $___________ in 50 years $__________ × 10.52 = $___________ in 60 years Your Current Monthly Rent Multiplication Factor to Determine Rent in Future Years at 6 Percent Annual Inflation Rate Projected Future Rent $__________ × 1.79 = $___________ in 10 years $__________ × 3.21 = $___________ in 20 years $__________ × 5.74 = $___________ in 30 years $__________ × 10.29 = $___________ in 40 years $__________ × 18.42 = $___________ in 50 years $__________ × 32.99 = $___________ in 60 years If you’re middle-aged or retired, you may not plan on having 40 to 60 years ahead of you. On the other hand, don’t underestimate how many more years of housing you’ll need. U.S. health statistics indicate that at age 50, you have a life expectancy of 30+ more years, and at age 65, 20+ more years (women on average tend to live a few years longer). Although the cost of purchasing a home generally increases over the years, after you purchase a home, the bulk of your housing costs aren’t exposed to inflation if you use a fixed-rate mortgage to finance the purchase. A fixed-rate mortgage locks your mortgage payment in at a fixed amount (as opposed to an adjustable-rate mortgage payment that fluctuates in value with changes in interest rates). Therefore, only the comparatively smaller property taxes, insurance, and maintenance expenses will increase over time with inflation. You’re always going to need a place to live. And over the long term, inflation has almost always been around. Even if you must stretch a little to buy a home today, in the decades ahead, you’ll be glad you did. The financial danger with renting long term is that all your housing costs (rent) increase over time. You shouldn’t buy just because of inflation, but if you’re not going to buy, you should be careful to plan your finances accordingly. You can make your house your own Think back to all the places you ever rented, including the rental in which you may currently be living. For each unit, make a list of the things you really didn’t like that you would have changed if the property were yours: ugly carpeting, yucky exterior paint job, outdated appliances that didn’t work well, and so on. Although some tenants actually do some work on their own apartments, it’s not typically endorsed because it takes your money and time but financially benefits the building’s owner. If, through persistence and nagging, you can get your landlord to make the improvements and repairs at her expense, great! Otherwise, you’re out of luck or cash! When you own your own place, however, you can do whatever you want to it. Want hardwood floors instead of ugly, green shag carpeting? Tear it out. Love neon-orange carpeting and pink exterior paint? You can add it! In your zest and enthusiasm to buy a home and make it your own, be careful of two things: Don’t make the place too weird. You’ll probably want or need to sell your home someday, and the more outrageous you make it, the fewer buyers it will appeal to — and the lower the price it will likely fetch. If you don’t mind throwing money away or are convinced that you can find a buyer with similarly (ahem) sophisticated tastes, be as unusual as you want. If you do make improvements, focus on those that add value: a deck addition for an outdoor living area, updated kitchens and bathrooms, and so on. Beware of running yourself into financial ruin. Changing, improving, remodeling, or whatever you want to call it costs money. Many home buyers who neglect other important financial goals (such as saving for retirement and their kids’ college costs) in order to endlessly renovate their homes. Others rack up significant debts that hang like financial weights over their heads. In the worst cases, homes become money pits that cause owners to build up high-interest consumer debt as a prelude to bankruptcy or foreclosure. You avoid unpleasant landlords A final (and not inconsequential) benefit of owning your own home is that you don’t have to subject yourself to the whims of an evil landlord. Much is made among real estate investors of the challenges of finding good tenants. As a tenant, perhaps you’ve already discovered that finding a good landlord isn’t easy, either. The fundamental problem with some landlords is that they’re slow to fix problems and make improvements. The best (and smartest) landlords realize that keeping the building shipshape helps attract and keep good tenants and maximizes rents and profits. But to some landlords, maximizing profits means being stingy with repairs and improvements. When you own your home, the good news is that you’re generally in control — you can get your stopped-up toilet fixed or your ugly walls painted whenever and however you like. No more hassling with unresponsive, obnoxious landlords. The bad news is that you’re responsible for paying for and ensuring completion of the work. Even if you hire someone else to do it, you still must find competent contractors and oversee their work, neither of which is an easy responsibility. Another risk of renting is that landlords may decide to sell the building and put you out on the street. You should ask your prospective landlords whether they have plans to sell. Some landlords won’t give you a truthful answer, but the question is worth asking if this issue is a concern to you. One way to avoid being jilted by a wayward landlord is to request that the lease contract guarantee you the right to renew your annual lease for a certain number of years, even with a change in building ownership. Unless landlords are planning on selling, and perhaps want to be able to boot you out, they should be delighted with a request that shows you’re interested in staying a while. Also, by knowing if and when a landlord desires to sell, you may be able to be the buyer! Advantages of renting your home Buying and owning a home throughout most of your adult life makes good financial and personal sense for most people — but not all people and not at all times. Renting works better for some people. The benefits of renting are many: Simplicity: Yes, searching for a rental unit that meets your needs can take more than a few days (especially if you’re in a tight rental market), but it should be a heck of a lot easier than finding a place to buy. When you buy, you must line up financing, conduct inspections, and deal with myriad other issues that renters never have to face. When you do it right, finding and buying a good home can be a time-consuming pain in the posterior. Convenience: After you find and move into your rental, your landlord is responsible for the never-ending task of property maintenance and upkeep. Buildings and appliances age, and bad stuff happens: Fuses blow, plumbing backs up, heaters break in the middle of winter, roofs spring leaks during record-breaking rainfalls, trees come crashing down during windstorms. The list goes on and on and on. As a renter, you can kick back in the old recliner with your feet up, a glass of wine in one hand and the remote control in the other, and say, “Ahhhhh, the joys of not being part of the landed gentry!” Flexibility: If you’re the footloose and fancy-free type, you dislike feeling tied down. With a rental, as long as your lease allows (and most leases don’t run longer than a year), you can move on. As a homeowner, if you want to move, you must deal with the significant chores of selling your home or finding a tenant to rent it. Increased liquidity: Unless you’re the beneficiary of a large inheritance or work at a high-paying job, you’ll probably be financially stretched when you buy your first home. Coming up with the down payment and closing costs usually cleans out most people’s financial reserves. In addition, when you buy a home, you must meet your monthly mortgage payments, property taxes, insurance, and maintenance and repair expenses. As a renter, you can keep your extra cash to yourself, and budgeting is also easier without the upkeep-expense surprises that homeowners enjoy, such as the sudden urge to replace a leaking roof or old furnace. You don’t need to buy a home to cut your taxes. Should you have access to a retirement account such as a 401(k), 403(b), or SEP-IRA plan, you can slash your taxes while you save and invest your extra cash as a renter. So saving on taxes shouldn’t be the sole motivation for you to buy a home. Better diversification: Many homeowners who are financially stretched have the bulk of their wealth tied up in their homes. As a renter, you can invest your money in a variety of sound investments, such as stocks, bonds, and perhaps your own small business. You can even invest a small amount of money in real estate through stocks or mutual funds if you want. Over the long term, the stock market has produced comparable rates of return to investing in the real estate market. Maybe lower cost: If you live in an area where home prices have rocketed ahead much faster than rental rates, real estate may be overpriced and not a good buy. Renting should also be cheaper than buying if you expect to move soon. Buying and selling property costs big bucks. With real estate agent commissions, loan fees, title insurance, inspections, and all sorts of other costs, your property must appreciate approximately 15 percent just for you to break even and recoup these costs. Therefore, buying property that you don’t expect to hold onto for at least three (and preferably five or more) years doesn’t make much economic sense. Although you may sometimes experience appreciation in excess of 15 percent over a year or two, most of the time, you won’t. If you’re counting on such high appreciation, you’re setting yourself up for disappointment. The pitfalls of the rent-versus-buy decision When you’re considering purchasing a home, you can do lots of reflecting, crunch plenty of numbers, and conduct copious research to help you with your decision. In reality, many people are tempted to jump into making a decision about buying or continuing to rent without setting all their ducks in a row. At a minimum, this information should help keep you from making common costly mistakes. Renting because it seems cheaper When you go out to look at homes on the market today, the sticker prices are typically in the hundreds of thousands of dollars. Your monthly rent seems dirt-cheap by comparison. You must compare the monthly cost of homeownership with the monthly cost of renting. And you must factor in the tax savings you’ll realize from homeownership tax deductions. But you must also think about the future. Just as your educational training affects your career prospects and income-earning ability for years to come, your rent-versus-buy decision affects your housing costs — not just this year, but also for years and decades to come. Fretting too much over job security Being insecure about your job is natural. Most people are — even corporate executives, superstar athletes, and movie stars. And buying a home seems like such a permanent thing to do. Job-loss fears can easily make you feel a financial noose tightening around your neck when you sit down to sign a contract to purchase a home. Although a few people have real reasons to worry about losing their jobs, the reality is that the vast majority of people shouldn’t worry about job loss. This doesn’t mean that you can’t lose your job — almost anyone can, in reality. Just remember that within a reasonable time, your skills and abilities will allow you to land back on your feet in a new, comparable position. We’re not career experts, but we’ve witnessed many folks bounce back in just this way. When losing your job is a high likelihood, and especially if you’d have to relocate for a new job, consider postponing the purchase of a home until your employment situation stabilizes. (If you haven’t demonstrated a recent history of stable employment, most mortgage lenders won’t want to lend you money anyway.) When you must move to find an acceptable or desirable job, selling your home and then buying another one can cost you thousands, if not tens of thousands, of dollars in transaction fees. Buying when you expect to move soon People move for many reasons other than job loss. You may want to move soon to advance your career, to be nearer to (or farther from!) relatives, to try living somewhere new, or just to get away from someplace old. Unless you’re planning to hold onto your home and convert it to a rental when you move, buying a home rarely makes sound financial sense when you expect to move within three years. Ideally, stay put for at least five years. Succumbing to pushy salespeople When you buy a house, you’re the one who’ll be coming home to it day after day — and you’re the one on the hook for all the expenses. Don’t ever forget these facts when you plunge into the thick of possibly purchasing a home. If you have lingering doubts about buying a home, apply the brakes. Many people involved in home-buying transactions have a vested interest in getting you to buy. They may push you to buy sooner (and buy more) than you intend to or can afford, given your other financial goals and obligations. The reasons: Many people who make their living in the real estate trade get paid only if and when you buy, and the size of their earnings depends upon how much you spend. Ignoring logistics Sometimes, when looking at homes, you can lose your perspective on big-picture issues. After months of searching, Frederick finally found a home that met his needs for both space and cost. He bought the home and moved in on a Saturday. Come Monday morning, Frederick hopped in his car and spent the next hour commuting. At the end of his workday, it was the same thing coming home. He was tired and grumpy when he arrived home Monday evening, and after making dinner for himself, he soon had to hit the hay to rise early enough to do it all over again on Tuesday. Initially, Frederick hoped that the trying traffic was an aberration that would go away — but no such luck. In fact, on many days, his commute was worse than an hour each way. Frederick grew to hate his commute, his job, and his new home. When you buy a home, you’re also buying the commute, the neighborhood, its amenities, and all the other stuff that comes along for the literal and figurative ride. Understand these issues before you buy. In the end, after 18 months of commuter purgatory, Frederick sold his home and went back to renting much closer to his job. Forgetting to consider what the commute from a home to his job would entail was an expensive lesson for Frederick. Don’t make the same mistake Frederick made; take your time and consider all the important factors about the home you’re thinking about purchasing. Overbuying Many first-time home buyers discover that their desires outstrip their budgets. Nelson and his wife, Laura, had good jobs and together made in excess of $150,000 per year. They got used to buying what they desired — they ate at fancy restaurants, took luxury vacations, and otherwise indulged themselves. When it came time to purchase a home, they spent the maximum amount and borrowed the maximum amount that the mortgage person told them they could. After the home purchase, Laura got pregnant and eventually left her job to spend more time at home. With the high homeownership expenses, kid costs, and reduced household income, Nelson and Laura soon found themselves struggling to pay their monthly bills and started accumulating significant credit-card debts. Ultimately, they ended up filing bankruptcy. Either you own the home, or it owns you. Get your finances in order and understand how much you can truly afford to spend on a home before you buy. Underbuying Remember in the story Goldilocks and the Three Bears how Goldilocks had difficulty finding porridge to her liking? In one case, it was too cold, and in another, too hot. Well, just as you can overbuy when selecting a home, you can underbuy. That’s what Nathan and Rebecca did when they bought their first home. They believed in living within their means — a good thing — but they took it to an extreme. Nathan and Rebecca bought a home whose cost was far below the maximum amount they could have afforded. They borrowed $70,000 when they could have afforded to borrow three times that amount. They knew when they bought the home that they’d want to move to a bigger house within just a few years. Although this made the real estate agents and lenders happy, all the costs of buying and then selling soon after gobbled a huge chunk of Nathan and Rebecca’s original down payment. Buying because it’s a grown-up thing to do Peer pressure can be subtle or explicit. Some people even impose pressure on themselves. Buying a home is a major milestone and a tangible display of financial maturity and success. If your friends, siblings, and co-workers all seem to be homeowners, you may sometimes feel as though you’re being a tad juvenile by not jumping on the same train. Everyone has different needs, but not everyone should own a home, and certainly not at every point in his adult life. Besides, although they may never admit it, some homeowning friends and colleagues are jealous of you and other financially footloose and fancy-free renters. A study even supports the notion that the life of a typical renter is, in some respects, better than that of the average homeowner. Peter Rossi and Eleanor Weber of the University of Massachusetts Social and Demographic Research Institute conducted a survey of thousands of people. Here are some of their findings: Homeowners are less social, on average, than renters — spending less time with friends, neighbors, and co-workers. Homeowners spend more time on household chores. Perhaps for the preceding reasons, renters have more sex and less marital discord and cope better with parenting than homeowners do! Buying because you’re afraid that escalating prices will lock you out From time to time, particular local real estate markets experience rapidly escalating prices. During such times, some prospective buyers panic, often with encouragement from those with a vested interest in converting prospective renters to buyers. Escalating housing prices make some renters feel left out of the party. Booming housing prices get all sorts of publicity, including from gloating homeowners clucking over their equity. Never in the history of the real estate business have prices risen so high as to price vast numbers of people out of the market. In fact, patient buyers who can wait out a market that has increased sharply in value are often rewarded with steadying and, in some cases, declining prices (witness what happened in the late 2000s). Although you won’t be locked out of the market forever, you should keep in mind that if you postpone buying for many years, you’ll likely be able to buy less home for your money thanks to home prices increasing faster than the rate of inflation. Misunderstanding what you can afford When you make a major decision, be it personal or financial, it’s perfectly natural and human to feel uncomfortable if you’re flying by the seat of your pants and don’t have enough background. With a home purchase, if you haven’t examined your overall financial situation and goals, you’re just guessing how much you should be spending on a home. Again, the vested-interest folks won’t generally bring this issue to your attention — partly because of their agendas and motivations, but also because it’s not what they’re trained and expert at doing. Look in the mirror to see the person who can help you with these important issues.

Article / Updated 07-07-2023

When you’re looking for the right house, it’s good to know the fair market value. This article helps you determine the fair market value of the properties you’re interested in. Believe it or not, houses are like Red Delicious apples. Most houses are green and need more time on the real estate tree before they’re ready to pick. A few are ripe for picking right now. The trick is knowing which is which, because houses don’t turn red as they ripen. That’s one reason you must understand fair market value and know the asking prices and sale prices of houses comparable to the one you want to buy. Smart home buyers know which houses are green and which are ripe. The basics of a helpful CMA The best way to accurately determine a home’s fair market value is to prepare a written comparable market analysis (CMA). A competent real estate agent can and should prepare a CMA for a home that you’re interested in before you make your purchase offer. Every residential real estate office has its own CMA format. No matter how the information is presented to you, the tables below show you what good CMAs contain. Sample CMA — “Recent Sales” Section Address Date Sold Sale Price Bedrm/Bath Parking Condition Remarks 210 Oak 04/30/20 $390,000 3/3 2 car Very good Best comp. Approx. same size and cond. as dream home (DH), slightly smaller lot. 1,867 sq. ft. $209/S.F. 335 Elm 02/14/20 $368,500 3/2 2 car Fair Busy street. Older baths. 1,805 sq. ft. $204/S.F. 307 Ash 03/15/20 $385,000 3/3 2 car Good Slightly larger than DH, but nearly same size and condition. Good comp. 1,850 sq. ft. $208/S.F. 555 Ash 01/12/20 $382,500 3/2.5 2 car Excellent Smaller than DH, but knockout renovation. 1,740 sq. ft. $220/S.F. 75 Birch 04/20/20 $393,000 3/3 3 car Very good Larger than DH, but location isn’t as good. Superb landscaping. 1,910 sq. ft. $206/S.F. Sample CMA — “Currently for Sale” Section Address Date Listed Asking Price Bedrm/Bath Parking Condition Remarks 220 Oak (Dream Home) 04/25/20 $395,000 3/3 2 car Very good Quieter location than 123 Oak, good detailing, older kitchen. 1,880 sq. ft. $210/S.F. 123 Oak 05/01/20 $399,500 3/2 2 car Excellent High‐end rehab. & priced accordingly. Done, done, done. 1,855 sq. ft. $215/S.F. 360 Oak 02/10/20 $375,000 3/2 1 car Fair Kitchen & baths need work, no fireplace. 1,695 sq. ft. $221/S.F. 140 Elm 04/01/20 $379,500 3/3 2 car Good Busy street, small rooms, small yard. 1,725 sq. ft. $220/S.F. 505 Elm 10/31/19 $425,000 2/2 1 car Fair Delusions of grandeur. Grossly overpriced! 1,580 sq. ft. $269/S.F. 104 Ash 04/17/20 $389,500 3/2.5 2 car Very good Great comp! Good floor plan, large rooms. Surprised it hasn’t sold. 1,860 sq. ft. $209/S.F. 222 Ash 02/01/20 $419,500 3/2 1 car Fair Must have used 505 Elm as comp. Will never sell at this price. 1,610 sq. ft. $261/S.F. 47 Birch 03/15/20 $409,000 4/3.5 2 car Good Nice house, but over‐improved for neighborhood. 2,005 sq. ft. $204/S.F. 111 Birch 04/25/20 $389,500 3/3 2 car Very good Gorgeous kitchen, no fireplace. 1,870 sq. ft. $208/S.F. These are facts. The CMA’s “Recent Sales” section helps establish the fair market value of 220 Oak — your dream home that’s currently on the market — by comparing it with all the other houses that: Are located in the same neighborhood Are approximately the same age, size, and condition Have sold in the past six months These houses are called comps, which is short for comparables. Depending on when you began your house hunt, you probably haven’t actually toured all the sold comps. No problem. A good real estate agent can show you listing statements for the houses you haven’t seen, take you on a verbal tour of the properties, and explain how each one compares with your dream home. Communicating well with your agent about subjective terms such as large, lots of light, close to school, and so on is critically important. You must understand precisely what the agent means when using such terms. Conversely, your agent must understand precisely what you want, need, and can afford. If you and your agent were to analyze the sale comps in our example, you would find that houses comparable to the home you want to buy — 220 Oak, in the “Currently for Sale” section — are selling for slightly over $200 per square foot. Putting the sale prices into a price-per-square-foot basis makes comparisons much easier. As you can see in the “Currently for Sale” section, anything that’s way above or below the norm really leaps out at you. The “Currently for Sale” section of the CMA compares your dream home (in this case, 220 Oak) with neighborhood comps that are currently on the market. These comps are included in the analysis to check price trends: If prices are falling: Asking prices of houses on the market today will be lower than sale prices of comparable houses. This may be due to an increase of distressed property sales. If prices are rising: You’ll see higher asking prices today than for comps sold three to six months ago. If you’ve been looking at houses in a specific area for a while, you’ve probably been in all the comps currently on the market in that area. You don’t need anyone to tell you what you’ve seen with your own eyes. However, you do need an agent’s help to compare the comps you’ve seen with comps you haven’t seen, because some houses sold before you began your house hunt. As the “Currently for Sale” section shows, your dream house appears to be priced very close to its fair market value based on the actual sale price of 210 Oak (in “Recent Sales” section). Given that 220 Oak has 1,880 square feet, it’s worth $392,920 at $209 per square foot. Factually establishing property value is easy when you know how. Your CMA must be comprehensive. It should include all comp sales in the past six months and all comps currently on the market. Getting an accurate picture of fair market values is more difficult if some parts of the puzzle are missing, especially in a neighborhood where homes don’t sell frequently. Like milk in your refrigerator, comps have expiration dates. Lenders usually won’t accept houses that sold more than six months ago as comps. Their sale prices don’t reflect current consumer confidence, business conditions, or mortgage rates. As a general rule, the older the comp, the less likely it is to represent today’s fair market value. Six months is generally accepted as long enough to have a good cross section of comp sales but short enough to have fairly consistent market conditions. But six months isn’t carved in stone. If a major economic calamity occurred three months ago, for example, then six months is too long for a valid comparison. Conversely, if homes in a certain area rarely sell, you may need to examine comparable sales that occurred more than six months ago. Sale prices are always given far more weight than asking prices when determining fair market value. Sellers can ask whatever they want for their houses; asking prices are sometimes fantasy. Sale prices are always facts — they indicate fair market value. The best proof of what a house is worth is its sale price. Don’t guess — analyze the sale of comparable homes. Be sure that the comparable sales information factors in price reductions or large credits given for corrective work repairs (for example, a $5,000 credit from the sellers to the buyers to replace a broken furnace). The flaws of CMAs CMAs beat the heck out of median-price statistics for establishing fair market values, but even CMAs aren’t perfect. People can use exactly the same comps and arrive at very different opinions of fair market value. Discrepancies creep into the CMA process if you blindly compare comps without knowing all the following details of the subject properties: Wear and tear: No two homes are the same after they’ve been lived in. Suppose that two identical tract homes are located next door to each other. One, owned by an older couple with no children or pets, is in pristine condition. The other, owned by a family with several small kids and several large dogs, resembles a federal disaster area. Your guess is as good as ours when figuring out how much it’ll cost to repair the wear-and-tear damage in the second house. A good comparable analysis adjusts for this difference between the two homes. Site differences within a neighborhood: Even though all the comps are in the same neighborhood, they aren’t located on precisely the same plot of ground. How much is being located next to the beautiful park worth? How much will you pay to be seven minutes closer to the commuter-train stop? These value adjustments are a smidge less precise than brain surgery. Out-of-neighborhood comps: Suppose that in the past six months, no homes were sold in the neighborhood where you want to live. Going into another neighborhood to find comps means that you and your agent must make value adjustments between two different neighborhoods’ amenities (schools, shopping, transportation, and so on). Comparing different neighborhoods is far more difficult than making value adjustments within the same neighborhood. Distressed property sales: Foreclosures are easy to spot; short sales aren’t. A house, for example, may come on the market as a normal owner-occupied property sale. However, sometime while it was being marketed or after an offer had been accepted but before the sale was completed, the house became a short sale because the owners didn’t keep up their loan payments. A good agent continually checks the Multiple Listing Service to determine if any properties you’re using as comps became short sales or bank-owned properties. If so, they may not be good comps because they sold under duress. Noncomp home sales: What if five houses sold in the neighborhood in the past six months, but none of them were even remotely comparable in age, size, style, or condition to the house you want to buy? You and your agent must estimate value differences for three- versus four-bedroom homes, old versus new kitchens, small versus large yards, garage versus carport, and so on. If the home you want has a panoramic view and none of the other houses has any view at all, how much does the view increase the home’s value? Guesstimates like these don’t put astronauts on the moon. These variables aren’t insurmountable obstacles to establishing your dream home’s fair market value. They do, however, greatly increase the margin of error when trying to determine a realistic offering price. You can minimize pricing problems created by these variables if you and/or your agent actually tour comparable homes inside and out. A valid comparison of your dream home to the other houses is impossible if you and your agent have only read about the comps in listing statements (brief data sheets about houses offered for sale) or seen the properties on a website. Here’s why: Most listing statements are overblown to greater or lesser degrees. You don’t know how exaggerated the statement is if you haven’t seen the house for yourself. You may consider the “large” master bedroom tiny. That “gourmet” kitchen’s only distinction may be an especially fancy hot plate. The “sweeping” view from the living room may exist only if you’re as tall as LeBron James. Of course, you won’t know any of these things if you only read the houses’ puff sheets instead of visiting them in person. Floor plans greatly affect a home’s value. Two houses, for example, may be approximately the same size, age, and condition, yet vary wildly in value. One house’s floor plan flows beautifully from room to room; the rooms themselves are well proportioned with high ceilings. The other house doesn’t work well because its floor plan is choppy and the ceilings are low. You can’t tell which is which just by reading the two listing statements. Whoever controls the camera controls what you see. Remember when viewing those stunning color photos or the video footage of a house advertised on a website that you’re permitted to see only what the person who took the pictures wants you to see. You certainly won’t get a peek at less desirable things, such as worn areas on the living room carpet or graffiti sprayed on the garage door of the house next door. Eyeball. Eyeball. Eyeball. Eyeballing — personally touring houses and noting important details both inside and out with your own eyes — is the best way to decide which houses are true comps for your dream home. Discover some common mistakes made by home buyers.

Article / Updated 07-05-2023

Good news. It doesn’t matter whether you buy a log cabin, Cape Cod colonial, French provincial, Queen Anne Victorian, or California ranch-style house. You can make money on any property by following three fundamental principles to select the home you buy. As you read the following home-buying guidelines, remember that they’re not hard-and-fast rules — exceptions do exist. The principle of progression: Why to buy one of the cheaper homes on the block An appraiser can tell you that the principle of progression states that property of lesser value is enhanced by proximity to better properties. English translation, please? Buy one of the cheaper homes on the block, because the more expensive houses all around yours pull up the value of your home. For instance, suppose that your agent shows you a house that just came on the market in a neighborhood you like. At $225,000, it’s one of the least expensive homes you’ve seen in the area. The agent says that the other homes around it sell for anywhere from $275,000 to $300,000. You start to salivate. Don’t whip out your checkbook yet. Do a little homework first. Find out why this house is so cheap. If the right things are wrong with it, write up the offer. If the wrong things are wrong with it, move on to the next property. Curable defects in a home If a house is a bargain because it has defects that aren’t too difficult or expensive to correct, go for it. For example, maybe the house is an ugly duckling that just needs a paint job, landscaping, and some other minor cosmetic touches in order to be transformed into a swan. Perhaps it’s the only two-bedroom house on the block, but it has a large storage area that you can convert into a third bedroom for not more than $15,000. For $240,000 ($225,000 for the house plus $15,000 to add the bedroom), you’re living in a $275,000 to $300,000 neighborhood. Such a deal! Problems like these are curable defects — property deficiencies you can cure by upgrading, repairing, or replacing the defects relatively inexpensively. Painting, modernizing a bathroom, installing new counters and cabinets in the kitchen, and upgrading an electrical system are some examples of curable defects. Depressed property values are another type of curable defect. A high number of short sales or foreclosures in a neighborhood drives property values down. One person’s misfortune is another’s opportunity. Some investors specialize in purchasing distressed properties at rock-bottom prices. These investors then rehab the houses and rent them out with an eye toward selling them for a profit when property values improve. Incurable defects in a home If a house has major problems, it’s not a bargain at any price. Who’d want a house located next to a garbage dump? Or what about a really ugly home? Just because the seller made a fortune in the sausage business doesn’t mean that you (or anyone else) would want to live in a house built in the shape of a giant hot dog. Maybe the house is cheap because a contractor says it’s a wreck about ready to fall down, and you’d have to spend at least $125,000 on a new roof, a new foundation, new plumbing, and complete rewiring. Enormous deficiencies like these are called incurable defects. They aren’t economically feasible to correct. You can’t fix the fact that a house is poorly located. Nor does it typically make sense to pay $225,000 for the hot-dog house so you can tear it down and build a new home (unless that’s what comparable vacant lots sell for). By the same token, if you pay $225,000 for the wreck and then pour in another $125,000 on corrective work, you’ll have the dubious honor of owning the most expensive house in the neighborhood. All rehabs aren’t bad. You just need to be prepared for what it takes to manage a fixer-upper. The benefits of renovating cheaper homes The less expensive houses on the block are also the least risky ones to renovate, thanks to the principle of progression. For example, suppose that you just paid $225,000 for a house that needs a major rehab. Your construction project is located smack-dab in the middle of a neighborhood of $300,000 homes. The difference between your purchase price and the value of the surrounding homes approximately defines the most you should consider spending on a rehab. In the preceding example, you should spend no more than $75,000 to bring your home up to the prevailing standard set by the other houses. Of course, this is assuming that you can afford to spend that kind of money and that you have the time and patience to coordinate the rehab work or do it yourself. As long as you improve the property wisely and stay within your budget, you’ll probably get most or all the rehab money back when you sell the property. Use the principle of progression in conjunction with location, location, value. Buying one of the better less-expensive homes in a good neighborhood enhances your likelihood of property appreciation in the years ahead. The principle of regression: Why not to buy the most expensive house on the block You guessed it. The principle of regression is the economic opposite of the principle of progression. If you buy the most expensive house on the block, the principle of regression punishes you when you sell. The lower value of all the other homes around you brings down your home’s value. If an evil spirit whispers in your ear that you should buy the most expensive house on the block to flaunt your high status in life, go to an exorcist immediately. Don’t succumb to the blandishments of the evil spirit unless the probability of losing money when you sell fills you with joy. Satisfy your ego — and make a wiser investment — by purchasing one of the less expensive homes in a better neighborhood. The most expensive house on the block is also the worst candidate for remodeling. Suppose that you buy a $300,000 home in a neighborhood of $200,000 houses. From an appraiser’s perspective, the home already sticks out like a financial sore thumb. Spending another $50,000 to add a fancy new kitchen to what is already the most expensive house on the block further compounds your problem. That new kitchen almost certainly won’t increase your home’s value to $350,000. No one can dispute the fact that you spent $50,000 on the kitchen if you have the receipts to prove your expenditures. But folks who buy $350,000 homes generally want to be surrounded by other homes worth as much as, or more than, the one they’re buying. Homes are like cups. When you fill a cup too full, it overflows. By the same token, when you make excessive improvements to your house (based on sale prices of comparable homes in the neighborhood), the money you spend on the rehab goes down the financial drain. This phenomenon is called over-improving a property. Even if you buy the least expensive house in the neighborhood, you can over-improve it if you spend too much fixing it up. The best time to guard against over-improving your house is before you do the work. If you’ll end up with the most expensive house on the block when you finish a project, don’t do the project. The principle of conformity: Why unusual is usually costly The principles of progression and regression deal with economic conformity. If you want to maximize your chances for future appreciation of the home you buy, your home should also conform in size, age, condition, and style to the other homes in your neighborhood. That’s the principle of conformity. This principle doesn’t mean that your home has to be an identical clone of every other house on the block. It should, however, stay within the prevailing standards of your neighborhood. For example: Size: Your home shouldn’t dwarf the other houses on the block, or vice versa. If your home is smaller than surrounding houses, use the principle of progression as a guide to bring it into size-conformity with the other houses and increase your home’s value. If, conversely, you have a three-bedroom home in a neighborhood of two- and three-bedroom homes, adding a large fourth bedroom to your house would violate the principle of regression. Age: You almost never see an older home in the midst of a tract of modern new homes. However, every now and then you find a brand-new home incongruously plunked in the midst of older homes. A modern home typically looks out of place in a neighborhood of gracious, older homes. Even if you get a terrific deal on the price, the modern home’s lack of conformity with other homes on the block will probably come back to haunt you when you attempt to sell it. Condition: The physical condition of your house has a tremendous impact on its value. Not surprisingly, your home loses value if it’s a dilapidated dump compared with the rest of the houses on the block. Ironically, having your home in far nicer condition than other houses in the neighborhood isn’t wise either. Even if your home conforms to all the other houses in size, age, and style, you still over-improve your home if the quality of materials, workmanship, and appliances in your home greatly exceeds the prevailing neighborhood quality standards. Style: The architectural style of the house you buy isn’t critical — as long as it conforms to the prevailing architectural style of other homes in the neighborhood. From an investment standpoint, for example, you don’t want to buy the only Queen Anne Victorian in a block filled with Pennsylvania Dutch Colonial houses, or vice versa. Nor should you buy a three-story home when all the surrounding houses are one story high. Your home doesn’t have to be a bland, boring replica of every other house on the block. You can follow the principle of conformity and still express your individuality by the way you landscape, paint, and furnish your home. You know you’ve done well when people use words like “tasteful” and “exquisite” to describe your home. On the other hand, your decorating motif is a problem if folks refer to your house as “weird” or “eccentric.”

Article / Updated 06-06-2023

Knowing how you spend your money now on housing and other items is only half the picture. You also need to know how much you’ll spend after buying your next home. Your expected expenses probably are going to change the most when you sell your current house and buy a new home. To help you determine your expenses after you buy a new home, check out these areas: Mortgage payment: Unless you’ve been squirreling away extra savings while living in your current house, the total amount you’re borrowing through your mortgage (and, therefore, your monthly mortgage payment) will probably increase if you trade up. By using our handy-dandy mortgage payment calculator, you can calculate the approximate monthly mortgage payment you’ll face in your new home. To calculate your monthly loan payment, multiply the relevant number from the following table by the total amount you’re borrowing, expressed in (that is to say, divided by) thousands of dollars. So, for example, if you intend to borrow $200,000 at 4.5 percent interest on a 30-year mortgage, you multiply 200 by 5.07 to come up with a monthly payment of $1,014. Property taxes: In most communities, the annual property taxes you pay on your next home purchase initially are set at a percentage of the property value. To find out the property tax rate in the area where you plan to purchase your new home, simply call the local tax collector, assessor, or other taxing authority (you can generally find these phone numbers online or in the government section of your local phone directory if you have access to one). Don’t base your property tax estimate on the amount the seller of the home you’re interested in buying is currently paying or on the amount you’re paying on your present house. When you trade up, the taxes on the home may be reassessed upward. Utilities: If you’re trading up, some of your utility bills — such as cable TV — may stay the same, but others may change. Until you have in mind a specific home to buy, you can’t request hard numbers on utility usage. In the interim, make some educated estimates. For example, if you’re planning on moving into a larger home in your area with, say, 30 percent more square footage, you can estimate that your heating and electric bills will increase by about 30 percent. However, if you’re moving from an old, energy-inefficient home into a newer and more efficient one, the new home may not cost you more in utilities even if it’s a bit larger. Furniture: If you buy a larger home, you’ll have more space to fill, so you’re probably going to spend more money on furnishings. Make a reasonable estimate of how much you expect to spend on new furnishings. If and when you trade up, remember the amount you budgeted for new furnishings; some trade-up buyers get carried away with redecorating and decimate their budgets after they move into their new properties. Maintenance: If you’re buying a more expensive home, you’re probably also going to spend more on maintenance, even if the home isn’t a fixer-upper. A good way to estimate your annual maintenance costs is to multiply the purchase price of the home by 1 percent (use 1.25 percent of the purchase price for older and more run-down properties). Federal and state income taxes: If you buy a more expensive home and have larger mortgage payments and property taxes, your income tax bill will probably go down. Why? Mortgage interest and property taxes are deductible expenses on Schedule A of your federal income tax Form 1040 and on most state returns. Homeowners insurance: If you buy a more expensive home, your homeowners insurance premiums may increase. In the absence of a specific quote for a property you’re interested in buying, you can estimate that your homeowners insurance costs will increase in proportion to the increased size (square footage) of your home. Because land isn’t insured, ignore the extra land that may come with your next home. Mortgage Payment Calculator Interest Term of Mortgage Rate (%) 15 Years 30 Years 4 7.40 4.77 4-1⁄8 7.46 4.85 4-1/4 7.52 4.92 4-3⁄8 7.59 4.99 4-f1/2 7.65 5.07 4-5⁄8 7.71 5.14 4-3/4 7.78 5.22 4-7⁄8 7.84 5.29 5 7.91 5.37 5-1⁄8 7.98 5.45 5-1/4 8.04 5.53 5-3⁄8 8.11 5.60 5-1/2 8.18 5.68 5-5⁄8 8.24 5.76 5-3/4 8.31 5.84 5-7⁄8 8.38 5.92 6 8.44 6.00 6-1⁄8 8.51 6.08 6-1/4 8.58 6.16 6-3⁄8 8.65 6.24 6-1/2 8.72 6.33 6-5⁄8 8.78 6.41 6-3/4 8.85 6.49 6-7⁄8 8.92 6.57 7 8.99 6.66 7-1⁄8 9.06 6.74 7-1/4 9.13 6.83 7-3⁄8 9.20 6.91 7-1/2 9.28 7.00 75⁄8 9.35 7.08 7-3/4 9.42 7.17 7-7⁄8 9.49 7.26 8 9.56 7.34 8-1⁄8 9.63 7.43 8-1/4 9.71 7.52 8-3⁄8 9.78 7.61 8-1/2 9.85 7.69 8-5⁄8 9.93 7.78 8-3/4 10.00 7.87 8-7⁄8 10.07 7.96 9 10.15 8.05 9-1⁄8 10.22 8.14 9-1/4 10.30 8.23 9-3⁄8 10.37 8.32 9-1/2 10.45 8.41 9-5⁄8 10.52 8.50 9-3/4 10.60 8.60 9-7⁄8 10.67 8.69 10 10.75 8.78 10-1⁄8 10.83 8.87 10-1/4 10.90 8.97 10-3⁄8 10.98 9.06 10-1/2 11.06 9.15

Article / Updated 03-30-2022

As a house seller, you should anticipate tough questions smart home buyers (or their agents) may ask you. Most sellers and their agents are quick to praise property features such as a remodeled kitchen, new roof, and swimming pool. That’s great, but what home buyers really want to know about are benefits — how house features translate into advantages for them. For example, that fancy kitchen may inspire more family meals, and a swimming pool becomes an entertainment center for healthy outdoor family activities during the lazy, hazy days of summer. Other types of benefits buyers may be looking for include quality schools, a low crime rate for safety and security, convenient nearby shopping, a hospitable neighborhood, and favorable fair market value (FMV) appreciation (showing the home is likely to be a profitable investment). You need to make sure you’re prepared to answer these potential questions in a manner that honestly represents your house without jeopardizing a potential sale. The best defense is a good offense. Sellers (and their listing agents) who are prepared should have nothing to fear from buyers who ask these questions. This list includes ten challenging questions you may be asked and some advice on how to handle them. What do you like best and least about living here? When someone asks you what you like the most and the least about living in your house, you don’t want to look like the proverbial deer in the headlights. Do your homework. Make a list of items you like about your house. Do another list of things you don’t like. On your “like” list, put things like waking up with the sun on your face, watching the moon rise while sitting on the back porch, family dinners in the kitchen, and playing board games by the fireplace — whatever you truly enjoy about your house. The “dislike” list is more difficult. On one hand, you don’t want to scare away buyers. Conversely, every property has flaws, and you want to be honest. Ray once owned a house he loved except when he had to do battle with poison oak. Maybe you don’t like navigating the driveway when it snows. Perhaps you hate the long central hallway or small kitchen or hot attic. Just because you dislike something about the property doesn’t mean the next buyer will. Folks in the market for a condo usually ask this question. They’re curious about the issues that don’t apply to a single-family detached home, such as a dictatorial condo homeowner’s association board of directors or a president who refuses to listen to condo owner opinions. Why are you selling this lovely house? When buyers ask you why you’re selling your house, they have a hidden agenda. They’re either probing your motivation for selling to see if they can exploit a weakness, or they’re looking for property flaws. If the buyer knows you’re under severe pressure to sell your property as soon as possible, that can weaken your negotiating position. (A few examples of deadline situations are things like buying a new home before you sell the old one, being transferred to a new job in another city, getting a divorce, and property foreclosure.) If you have a deadline and the buyers don’t, they may use that deadline against you. Therefore, never divulge your deadline. If you have a nice, unstressed reason for selling, candidly answer the question. “We’re selling because the house is too big for us since the kids moved out to start their own families” or “We’d like a bigger place because the kids need rooms of their own” are examples of answers that won’t get you in trouble. If, however, you’re going through the divorce from hell or are about to depart for Timbuktu tomorrow, just say, “My housing needs have changed” and change the topic. How much did you pay for this house? Some buyers may want to know the amount you paid for your house in order to discover how much room you have to negotiate on price and terms. In most states, the seller’s purchase price is recorded in the public records (and, thus, can generally be found online with a little hunting). But even in the few states that don’t record price information, the buyer’s agent can usually find out what you paid through the local Multiple Listing Service (MLS) or by other methods. A related question that buyers may ask you or your listing agent is “What is the current mortgage balance, and are there any other liens, such as a second mortgage, a home equity loan, or a mechanics’ lien?” The answer shows prospective buyers how much cash you need to pay off those secured obligations. This information can give prospective buyers a peek into your motivation or your ability to carry back a second loan if the buyer is seeking seller financing. Cost and fair market value are wildly different things. Cost is a measure of past expenditure. Fair market value is what a buyer will pay and a seller will accept for something given the item has had proper exposure to the market and neither the buyer nor the seller is under duress. Smart buyers know that what you paid for the house when you bought it has little or no bearing on its value today. You may have made extensive renovations. Certainly, internal and external market factors have changed since you acquired the property. Talking about what you paid for your house is as productive as discussing the price of tea in China. How did you establish the asking price? Some prospective home buyers may ask how you determined your asking price, usually because they suspect it is too high. Smart sellers base their asking price on facts established by a written comparable market analysis (CMA). You or your agent can respond to this question by telling buyers about other properties comparable to yours in size, age, location, and condition (comps) that are either currently on the market or have sold within the past six months. Comps are the best, most powerful indicators of FMV. Have you received inspection reports? Buyers may ask you when or if your house was inspected, and this question should be an easy one to answer. Obtain customary inspections before putting your property on the market. That step gives you time to decide whether you want to do the recommended repairs before you put your house on the market or sell the property “as is” and let the buyer make the repairs (often in return for a credit in escrow for the buyers). Always fully divulge any and all corrective work you’ve done recently. Dig out old invoices and receipts, which support your narrative, and remember to check for warranties that may be transferable to a buyer. Customary local inspections vary. Local realty agents can tell you which inspections are required or recommended in your area, such as for termites, radon, energy efficiency, building code compliance, and so on. Either you or your agent should have any recent inspection reports easily available for serious buyers to inspect. This process saves time and removes the fear some prospective buyers may have that you’re trying to hide something. May I see your written defect disclosure statement? If a prospective buyer asks to see your written defect disclosure statement, you should say, “Sure, here it is.” Sellers who don’t prepare a written disclosure form for serious prospective buyers to review before making a written purchase offer are waving a red flag that warns buyers you don’t have a savvy listing agent who insists on such defect disclosures at the time of signing the listing agreement or that you may be hiding something. Smart buyers understand some sellers may lie or “forget” to disclose a known property defect. If you have to ask whether to disclose something about your property or the immediate neighborhood, you’ve probably answered your own question. When in doubt, disclose. Most states now have laws or precedent court decisions requiring some form of written home defect disclosures. Even in the few states where there aren’t disclosure requirements, smart agents recommend that their sellers provide written house defect disclosures to prevent future lawsuits. Most agents now also recommend that home buyers obtain their own professional home inspection reports even if the seller already has provided one. Are there any neighborhood changes coming that may affect the home’s desirability? House sellers almost always know if any significant civic changes are under discussion, such as street widening, construction of a freeway, or a planned special assessment for civic improvements such as new sewers or streets. However, smart buyers will verify any planned improvements affecting the property at the local city hall or other government agency. Any of these changes would materially affect the property values. Therefore, you should disclose all recent and proposed changes in writing to prospective buyers. This info includes plans your neighbors may have to improve their property if such improvements affect your house’s views or your access to adjoining public areas. How many times in the last year have you called the police and why? When potential buyers ask about police calls and possible neighborhood nuisances, they’re trying to determine how safe and secure your house is. Answering this question is easy if you don’t have any problems of this nature. If, however, you do, you must disclose any and all such problems. This open-ended question covers many potential problems, which can affect a home’s desirability. These problems include barking dogs, noisy late-night parties, and troublesome neighbors. If the situation is continuing, make sure you disclose all issues to prospective buyers to prevent a future lawsuit for nondisclosure of a serious defect. A visit to the local police station, or its website, can reveal local crime statistics for the neighborhood. Also, this is usually the place to search public records for any registered child sex predators living nearby (called Megan’s Law). But home buyers shouldn’t expect sellers to know the neighborhood crime statistics, nor to know if a registered sex offender lives nearby. Responsible buyers are their own best investigators. What problems have you had with the house? This open-ended question is intended to bring out past problems, which may have been solved. But, even if you think you solved a problem, you should protect yourself by disclosing the problem and how and when it was repaired. Failure to do so can lead to an allegation of under-disclosure. A common example is the seller who has had a roof leak patched. The problem was solved, at least temporarily, so why disclose? Because the fact that there was a leak and repair speaks to the condition and/or quality of the roof. This disclosure may lead the buyer to have a roof inspection. If you can prove that the buyer knew the condition of the roof at the time escrow closed, you’re unlikely to hear from her when the time comes to replace the roof. This question has one major thing in common with many of the other questions in this chapter — a variation of queries about property inspection reports and defect disclosure forms. Buyers have many ways of probing for property defects. Answer this question by giving the buyer a copy of your written disclosure statement. What are the local public schools like? If prospective buyers have school-age children, they may ask this question first. Even if buyers don’t have children, the quality of the public schools has a strong effect on whether families with children want to move to your area, thus affecting buyer demand and future appreciation in market value. Presuming your school system’s test scores are good, you can provide the data yourself. Contact your local district or visit its website if your agent doesn’t have the data already. Just be careful not to imply that your house is within a particular boundary area for a particular school unless you’re 100 percent certain you’re correct!

Article / Updated 03-30-2022

Each home seller’s personal situation and motivation for selling is unique. The following discussion describes the most common reasons why sellers choose to sell without using an agent. You want to save money on commissions People who take the for sale by owner (FSBO) route often do so to avoid having to pay real estate agent commissions. The lion’s share of the expenses related to selling your house are typically real estate agent commissions, which can gobble a large portion of your house’s equity (that is, the difference between the market value of your house and outstanding mortgages). In most areas of the country, a 5 to 6 percent real estate brokerage commission is common. Thus, on a $250,000 house, the commission typically sets you back $12,500 to $15,000. You may already have a ready, willing, and able buyer If you spread the word that you’re planning to sell your house, you may turn up someone who’s financially able to buy and willing to pay you the amount that you feel your house is worth. Good for you. Why pay a full commission if you’ve already found a buyer? You’re in a good position to either negotiate a reduced commission with a real estate broker or hire an attorney to help you complete your transaction. Whether you’re contemplating selling your house with an agent or doing a FSBO, tell as many prospective buyers as possible that you’re interested in selling. Although most people don’t find a buyer for their house simply by getting the word out through their own network of friends and contacts, you won’t know whether you’ll be one of the fortunate few who successfully sell their houses this way unless you try. Before you start getting the word out, take these tips to heart: Make sure that selling your house is the correct course of action for you. Determine the fair market value of your property. Ensure that your house looks its absolute best. Hire a good real estate lawyer to review your house sale contract and other documents. You may know the house and neighborhood well You may know more about the strengths of your house and neighborhood than local real estate agents, especially if you’ve lived in an area for many years. You may be able to speak from personal experience about how child-friendly the neighborhood is and how terrific the local schools are. You can praise the virtues of nearby shopping, transportation, and entertainment. You can gush about your wonderful neighbors. And you can point with pride to all the improvements you’ve made to your house over the years. Be careful in praising your house and neighborhood. Even the most interested prospective buyer can get turned off if you’re overbearing or sound like a used car salesman. And, what you say about your property may cause you legal problems down the road. If you’re going to sell without a real estate agent, be sure to have a good real estate lawyer on your team to assist you with mandatory property transfer disclosures and to provide advice about what you should avoid saying about your house. Here's an actual example of legal problems caused by statements made (in this case by the real estate agent) to a prospective buyer. She was showing the back yard to a buyer and waived her arm expansively, stating, “This will all be yours.” Turns out the back fence was located 6 feet into the neighbor’s yard. Since “all they saw” during the showing was not theirs, they sued the agent for the lost 6 feet. You may be more motivated than an agent Your house and the money you have tied up in it are important to you. Some real estate agents, despite having dollar signs in their eyes in anticipation of the commissions they’ll earn if they sell your house, may be less than eager to invest sufficient time in promoting and showing your property. If you decide to use an agent to help you with your sale, exercise great care in choosing the right agent. Avoid overextended agents who juggle too many listings and clients to give your house sale the attention it deserves. You like challenges Some people don’t select the easier path. For example, instead of working for a corporation, you may be the type who starts your own business. Many small business owners say that the desire for a potentially higher income wasn’t the primary reason they started their own business. Some small business owners pursue this career path as a means of self-expression, to make a contribution to a particular field, or for the pleasure of working with and satisfying customers. For the same reasons, some people try to sell their houses by themselves. Although most FSBO sellers are eager to save commission dollars, a few do it for the challenge or because they want to apply skills they possess to selling their own house. You want to be in control Some folks just don’t like giving up control. If you’re the type of person who wants to be in charge, you may be unwilling to relinquish control to an agent. If you sell your house yourself, you can decide when and where to place ads for your house and exactly what features to emphasize. You may want to say when it is and isn’t okay to have strangers (interested buyers and their agents) strolling through your house. Perhaps you want to ensure that your cat or the family dog isn’t let out of the house by an agent who fails to notice your special showing instructions. Whatever the reason, for better or worse, you’re the boss with a FSBO. Your house may sell itself If the local real estate market is strong and good houses get multiple offers as soon as the For Sale sign goes up, you may feel that selling your wonderful house will be a snap. All things considered, FSBOs usually are more successful in a seller's market than a buyer's market.

Article / Updated 03-30-2022

When you own a home, the odds are extraordinarily high that someday you’ll sell it. People who live their entire lives in their first home are rare. Selling a house is generally somewhat less complicated than buying one. But just because selling a house may be easier than buying one doesn’t mean that most people sell their houses properly. If word gets out that you’re considering selling your house, real estate agents will be attracted to you like hungry mosquitoes are to the only person on a desert island. And when you sell a house, the IRS and state tax authorities may be waiting to attempt to take a chunk of your profits, especially if you don’t take the time to understand tax laws and how to make them work for you before you sell. Here, you learn about some important issues that you should weigh and ponder before you sell your home. Why are you selling your house? Start with the basics. If you’re contemplating selling, consider whether your reasons for selling are good ones. For example, who wouldn’t like to live in a larger home with more amenities and creature comforts? But if you hastily put your home on the market in order to buy a bigger one, you may be making a major mistake. If your next, more expensive home stretches you too far financially, you may end up in ruin. When you need to relocate for your job, or when you have a major life change, moving may be a necessity. Even so, you should weigh the pros and cons of keeping your property versus selling. Can you afford to buy the next home? If you want to buy a more costly property, such a move is known in the real estate business as trading up. Doing an honest assessment of whether you can really afford to trade up is imperative. No mortgage lender or real estate agent can objectively answer that question for you. Based on your income and down payment, the lender and agent can tell you the most that you can spend. They can’t tell you what you can afford to spend and still accomplish your other financial and personal goals. One of the biggest mistakes that trade-up home buyers make is overextending themselves with debt to get into a more expensive property. The resulting impact on their budgets can be severe — no money may be left over for retirement savings, for educational expenses, or simply for having fun. In the worst cases, people have ended up losing their homes to foreclosure and bankruptcy when they suffered unexpected events, such as job losses or the deaths of spouses who had inadequate insurance. Before you buy your next home, get a handle on what you can really afford to spend on a home. Unless your income or assets have increased significantly since the time that you purchased your last home, you probably can’t afford a significantly more expensive property. The most important issue for people to consider is how spending more money each month on a home will affect their ability to save for retirement. What’s is your house worth? When you’re ready to sell your house, you’d better have a good understanding of what it’s worth. You (and your agent, if you’re using one) should analyze what comparable properties are currently selling for in your neck of the woods. If you need to sell your house without wasting a ton of time and energy, do what smart retailers do: Price it to sell. It’s not a good idea to give your property away, so to speak, but you should avoid inflating your asking price to a point far above what the sales of comparable houses suggest that your house is worth. You may be tempted, particularly when you’re in no great hurry to sell, to grossly overprice your house in the hope that an uneducated buyer may pay you more than the property is really worth. The danger in this strategy is that you won’t find a fool who will part with all that money for your overpriced property, and no one else will bid on it. Then, as you lower the price closer to what the house is really worth, prospective buyers may be wary of buying your property because of the extended length of time that it’s been on the market. In the end, you may have a hard time getting 100 percent of what your house is really worth. Have you done your homework to find a good real estate agent? When most people are ready to sell their houses, they enlist the services of a real estate agent. Good agents can be worth their commission if they know how to prepare the property for sale, market it, and get it sold for top dollar. Unlike when you’re a home buyer, your interests as a seller are aligned with a good agent’s interests — the more you sell the property for, the more you net from the sale, and the more the agent gets paid. Given how much homes actually cost (and how much they cost to sell and buy), you owe it to yourself to have a good agent representing you in the sale of your house. Be sure the agent you select isn’t currently listing so many other properties for sale that she lacks enough time to properly service your listing. Also, the agent you worked with when you bought the home isn’t necessarily the best agent to hire when you sell it. Different steps and expertise are required to sell (rather than buy) a house. Do you have the skills to sell the house yourself? Although some property owners possess the skills and time needed to sell a house themselves, most don’t. The carrot that may entice you to sell a house yourself is the avoidance of the 5 to 7 percent sales commission that agents ask for before they attempt to sell your property. Don’t forget, however, that half of this commission goes to a buyer’s agent. Because most buyers work with agents (partly because the agents’ services appear to be at no cost to the buyers), you’ll potentially save yourself only 2.5 to 3.5 percent of your property’s final selling price by selling it without an agent on your side. Whether or not you sell the house yourself, interview several agents who’ve demonstrated that they know your neighborhood as a result of listing and selling properties in the area, and ask them to prepare a comparable market analysis for your house. Base your asking price on what comparable properties have sold for in the past six months. If you’re shopping for an agent, also ask each one for an activity list of all the houses he has sold over the past 12 months so you can obtain references from property sellers who’ve worked with each agent. Have you properly prepared the house for sale? The real work of selling a property begins before you ever formally place it on the market for sale or allow the first prospective buyer through the front door. Prepare your house for sale both inside and out. At a minimum, you should do the sort of cleanup work that you do before your parents (or perhaps the in-laws) visit — you know, scrambling around the house cleaning everything up (or at least tossing it under beds and into closets!). If you’d like to take preparation to a higher level, consider staging. Just as stagehands set the stage for Broadway productions, smart sellers have their house staged to create a production designed to wow prospective purchasers. Professional stagers know how to emphasize the best features of a house and minimize the worst. You may not have to spend a fortune to stage your property. Small bucks spent wisely on staging can pay rich rewards. But you have more to do than just running a vacuum (after you pick up the laundry from the floors) and washing the dishes. Have some good but brutally honest friends and prospective agents walk through the house with you to point out defects and flaws that won’t cost you an arm and a leg to fix (for example, repairing leaky faucets or painting areas in need of new paint). Don’t be defensive — take good notes! You should generally avoid major projects, such as kitchen renovations, room additions, and the like. Rarely will you get a high enough additional sales price to compensate you for the extra costs (and headaches) of these major projects (not to mention for the time that you spend coordinating or doing the work). Do you understand the house’s hot buttons? People don’t buy homes — they buy a hot button, and the rest of the home goes with it. Hot buttons vary from home to home. Dynamite kitchens or baths, fireplaces, views, and gardens are often buyer turn-ons. Location is the hot button for people who must live in a certain neighborhood. How can you determine your house’s hot buttons? Think back to what appealed to you when you bought it. What you liked then will probably be the same hot buttons that will appeal to the next buyers. After you identify the hot buttons, emphasize them in your listing statement, multiple-listing description, and newspaper ads. Successful sellers know what the buyers will buy before they begin the marketing process. What are the financial ramifications of selling? Before you sell your house, you should understand the sale’s financial consequences. For example, how much money will you spend on fix-up work? How much should you be netting from the sale in order to afford your next home? Unless you want to and can afford to be the proud owner of two homes, always sell your current house before you commit to buying another. You can ask for a long close of escrow and a rent-back, if necessary, so you have time to close the sale of your next home without camping out on the street. Be sure about these things up-front so you won’t have nasty surprises along the way or after you sell. Do you know the rules for capital gains taxes on the sale of a house? Under current tax laws, most house sellers enjoy a significant tax break. Specifically, a large amount of capital gains, or profits, on the sale of a home are excluded from tax: up to $250,000 for single taxpayers and $500,000 for married couples filing jointly. To qualify for this capital gains exclusion, the seller must have used the house as her principal residence for at least two of the previous five years. This requirement is reduced to one year for a person who has become physically or mentally unable to care for themselves. Also, time spent living in a nursing home or other health care facility counts toward this one-year requirement. You can use the capital gains exclusion no more than once every two years. For the vast majority of house sellers out there, the current laws are a boon. Most people’s house-sale profits don’t come anywhere near the law’s exclusion limits. However, there are a few homeowners out there — especially those who live in higher-cost areas and who’ve owned their homes for many years — whose gains exceed the $250,000 or $500,000 limits. If they sell, they’ll owe tax on whatever profits exceed their applicable exclusion limits. Do you really need to sell your home? This guide can help you decide if it's right to sell.

Cheat Sheet / Updated 03-24-2022

When it’s time to sell your house, you need all the advice you can get. What you can expect from a Realtor, what you can — and should — research yourself, and what to do after the sale are all important bits of information you need to have. This Cheat Sheet has tips that will help you get ready to sell.

Article / Updated 03-07-2022

Buying a home is most people's first foray into the world of real estate. However, real estate can also be a good place to invest your money and see a profit. More people invest in the stock market than invest in real estate (beyond the home in which they live). Some reasons for this are due to misconceptions. These misconceptions also cause some investors to see less-than-stellar returns on their real estate investments. Here are common real estate misconceptions followed by why they are wrong: You need to be wealthy. Although it's true that you need money to play the game of investing in real estate (for a down payment), you don't need millions or even hundreds of thousands of dollars to get started. A five-figure ($10,000+) savings balance provides a point of entry into good investment properties. You need to be a high-income earner. So often in the news we hear about the Donald Trumps and other big-income earners as the ones making big bucks investing in real estate. But there's no reason you need a million-dollar-plus income to invest successfully in property. You don't even need a $100,000+ income. Many folks begin investing in real estate while earning modest wages or salaries. You need to have connections and know the "right" people. You should certainly have a team of competent real estate professionals and contractors and suppliers, but anyone can assemble such a squad. You need to be lucky to make big money. A little bit of luck is always welcome of course, but the key to making money with real estate investing is to do your homework. Find the right property in the right location, acquire that property at a fair price, and successfully manage all of your properties well over time. It doesn't matter who you rent your property to as long as you keep the property occupied. Real estate investors often overlook or downplay the importance of tenant selection. Properly preparing the property to attract the most qualified prospective tenants and then targeting your advertising to that target market are the first two steps to increasing your odds of finding a qualified tenant. You want to look for tenants who will stay for the long term, treat your property with care and respect, and essentially make your mortgage payments for you and build up your equity. It's not worth investing in real estate unless you buy can a large property. False! Most people who invest in real estate get started with small, less costly properties. Bigger and more expensive properties typically come many years down the road. The collapse in real estate prices before and during the 2008 financial crisis shows real estate isn't a good investment. Real estate, like stocks and other ownership-type investments, goes through cycles. But if you do your homework and buy solid properties at fair prices and manage them well over time, you should earn solid returns. Also, keep in mind that values of different types of properties in various locations don't all move in lockstep. The best way to make money in real estate is to buy and flip properties, especially if you can renovate them. Holding a property for a relatively short period of time ensures that your transaction costs of buying and then selling will consume a large portion or even all of your profits. Also, your profits may end up being taxed at higher tax rates for shorter holding periods. Once you own several properties, you can enjoy sitting back while the profits roll in. Wrong! Managing rental properties and doing it well takes time and resourcefulness. There are no shortcuts, especially if you want to avoid unpleasant surprises and make the most of your properties. You should always buy small properties to add to your holdings and continue to manage these multiple rentals. Acquiring small properties to begin your real estate investing career certainly makes sense, and you can do quite well over many years. But at some point, you should seriously consider selling some of the smaller properties and consolidating your real estate holdings into larger properties. Take the equity you have built up over time in the small properties and use it to purchase medium to larger properties. By selling several smaller properties and buying a larger one, you can take advantage of the economies of scale that a larger property offers. With larger properties, either you can manage them or you can hire professional management if you want to avoid the day-to-day headaches often associated with tenants, maintenance, and upkeep.