Monday, June 27, 2005

Eliminating Inspections: What Could Go Wrong

There are plenty of inspections a purchaser could select in the home buying process. The most well-known inspection, is of course, the home inspection. This is the one where you get together with someone that knows a lot more about houses than you do, who arrives with a flashlight, ladder, screwdriver, and hopefully a T-shirt long enough to hide any unsightly crevices during the process, and meander through your future home to find all the defects you care to discover.

After all, who would want to purchase a lemon, right? Who would be that stupid? It's interesting, in market's across the country, buyers are paying more attention to their car purchases (for roughly $20,000) than they are the house they're buying (roughly, average national price $200,000 -- but of course, in the Washington, DC, area, it's more than double that amount).

But what are you to do in a scenario where the ultimate goal of the purchaser and his/her agent is to get the house, period? Forget good price, condition and location -- just get the darn thing. How can a buyer protect him or herself?

It's not iron clad, but here are a few suggestions you can take with you in that next competitive home visit. Some Realtors are going to be very irritated at my answers, but, hey, this is war.

Treat your home visit more like an inspection when you walk through it.
Along with your agent, take a couple of tools -- a flashlight and a receptacle tester, at least. As you go through the house start testing a few things like you would while buying a car. No honest car owner would be upset if someone asked to look under the hood, crank the engine, goose the gas pedal and to take it for a spin -- you would be thought crazy if you didn't.

Since many jurisdictions are in seller markets, keep in mind this visit may be your only chance to make sure all the toilets flush. With your flashlight, start looking in crevices, nooks and crannies throughout the house.

While you don't want to "invade" someone else's property, at least do a little prodding to make sure the basics are in working order. Turn on every light switch. Try every faucet and spigot. Open every cabinet. Pull out all drawers and test all doors. If accessible, open a few windows. Look around the base of hot water heaters and furnaces for leakage of water or any other fluids -- oil, rust, etc.

Insist on an information-only inspection in your contract.
What this means is that you basically want to know what you're getting into, but you're not making the contract "contingent" on a satisfactory home inspection. What you'll be able to do with this contract, however, is to determine if certain items that are supposed to be working even without a contingent home inspection are actually in working order.

In the Washington, DC, area, that would be Paragraph 3 of the Regional Sales Contract. Plumbing, electrical, appliances, heating/air, etc., must be in working order even without a home inspection. Sellers would be well advised to accept such an inspection so that they don't receive letters from attorneys when the buyer moves in and finds problems with these systems later.

In conjunction with this type of inspection, the buyer should invest in a home warranty (roughly $350 - $500) to cover these systems in the first year of the homeownership. While the policy will carry various provisos and limitations, it can help provide piece of mind for the new homeowners.
I've seen many homeowners who's policies more than paid for themselves through the repair or replacement of an air conditioner, heat pump or certain appliances.

As the market continues at a heated pace, buyers need to take matters seriously and try to inspect what they expect in their home purchase.

Published: June 24, 2005

Ratified Contract: the Beginning of the End

Hot markets can sometimes oversimplify the real estate market. It looks like houses sell as quickly as they come on the market. The signs change each hour or day: For Sale, Under Contract, Sold. What's so hard about that? It appears that all you have to do is place your property in the local MLS, plug a sign in the yard, and voila, it sells -- multiple contracts, high prices, run to the bank laughing insanely.

If it would only be so easy. A smooth transaction guided by a professional Realtor is a lot like having an experienced projectionist at the movie theater -- you only notice him when something goes wrong.

Drawing a contract in a hot market isn't as easy as it may sound -- at least, not a good contract. And that's what Realtors battle with a lot today -- is this a good offer from a reputable buyer who can actually perform on the contract they have presented?

After the sale, it goes to settlement and that requires a lot of paperwork and expertise to ensure each step gets completed so no one gets sued. Here are a few of the items that have to be taken care of from Sold to Settled:
Ratified contract: first of all, you have to get everyone to sign off on every little item and remove all contingencies as soon as possible. Once all contingencies are removed (financial, inspections, sale of home, etc.), then your first step toward escrow has occurred. This one is pretty extensive because of all the forms required by law: agency disclosure, lead disclosure, property disclaimer/disclosure, RESPA disclosure, all the addenda (several dozen are possible).

Apply for mortgage. I mention this here only because it's assumed in most markets that you're already pre-approved -- but now you have to turn that lender letter into an actual loan.

File all the documents and get them to the escrow company. The settlement company is going to conduct title search and make sure everyone gets paid. Your agent couriers all the materials to the settlement agent who starts a case file and begins checking off who's going to be at the settlement table and compiles a list of names, addresses, invoices, etc., to pay everyone.

Order all inspections: termite, home, radon, lead -- any of these may be required depending on what's happening in your area. These have to be ordered quickly so that repairs can be completed or addenda can be written to agree who's going to take care of them.

Insurance: set up your insurance with the new property (both hazard and title). The hazard insurance is your homeowners insurance policy and must be in place the day you settle. The title insurance is also purchased at the table. Buyers be sure to find out how long the policy from your seller has been in place. You may be able to receive a discount if you can transfer the policy instead of purchasing your own.

Order/supervise repairs. If defects, termites, radon or lead is present in the house it has to be dealt with. Some of them must be corrected according to the contract, others must be fixed because of federal law, while still others may not have to be fixed at all if the house is being sold "as-is" or if the buyer agrees to not having it fixed. Just because you may be in a sellers' market doesn't mean you've relieved yourself from any repair jobs -- it just depends.

Draft post-contract agreements: this could be a pre- or post-settlement occupancy agreement; agreements to take possession of the property before settlement to start contract work on the place; or various other arrangements between buyer and seller.

Performing the contract: here's the hard part. Once the contract is ratified each step has to be completed:

  • coinciding settlements
  • seller purchasing a home of choice
  • drafting a gift-letter for the buyer
  • gaining a third-party approval of the contract
  • drafting and pulling in all necessary powers of attorney
  • getting home owners documents to the purchaser in a timely manner, then the buyer getting them inspected in time

There are scores of items that are required according to your contract and you and your agent had best be ready to coordinate them appropriately or lose the house.

Friday, June 10, 2005

If You've Got A Loan, You've Got A Termite Inspection

When a home buyer signs up for a mortgage on his or her property, that means a termite inspection will soon occur on the property. In most contracts, you'll find an order for a termite inspection. It's negotiable who will order and pay for the inspection, but you'll have one regardless, especially if you have a mortgage.

The National Pest Management Association (NPMA) estimates that termites cause nearly $5 billion in damage per year in the United States. Many times homeowners don't find out about this damage until they receive a contract on the house and have to order the inspection. By then the damage is already done and many times it's pretty expensive.

There are some tell tale signs of damage, according to the NPMA web site:

Swarming of winged forms in the fall and spring. (This has already happened in most areas, where you'll see a cloud of insects, much like a group of gnats in the summer – but these will be much larger.)

Mud tunneling in, over and under wood structures

Wooden structures exhibit darkening or blistering

Damaged wood becomes extremely thin and can be easily punctured by a knife or a screwdriver
EPestSupply is a provider of products for the industry and has some very descriptive photos and graphs about how to identify termite and other subterranean creatures that might be attacking your house. You can visit their site on termite identification for some good photos and advice.

If you see some of these pests around your house -- don't panic -- they may not actually be termites. Closer inspection can help determine what you're really looking at in your yard. Pick up the bug (they don't bite) and look at them under a magnifying glass. If they are red and black or dark brown, you may have some carpenter ants. If it has a solid black body, you indeed have subterranean termite swarmers – which feed off of wood that has comes in contact with water. If the creature has a solid red body, it's more than likely a drywood swarmer, which is a termite that feeds off of -- you got it -- dry wood.

You may ask, "Why all the concern about termites when selling a house?" The primary reason is that it's hidden damage. Termites eat from within and while you can find signs of damage, such as the blistering and darkening listed above, by the time you discover it, it may be too late. Just killing the insects may not be enough to satisfy the contract. Repair could include major structural renovation, meaning ripping out walls, replacing studs and joists, resealing the wall, spackling, painting, etc.

Since termites hit primarily in the foundation area, this is where pest inspectors will look first.

The University of Nebraska Cooperative Extension Service in Lincoln says, "Places to inspect for termite activity are wooden constructions in basement and crawl space, wood sills, joists, support posts, basement window frames and wood under porches. Scrap wood on the ground or a woodpile next to the house should be removed as these potential feeding areas may allow termites easier access to your house. Termites may also be found in dead trees or wood stumps after a dead tree has been removed."

Damage can be minuscule and cost just a few hundred dollars to repair, however, since the damage is usually done unseen, it could run up to tens of thousands of dollars once a full scale inspection is completed.

A home purchaser in 1998 found out the hard way in New Orleans. She had purchased her "dream home" using a large amount of cash she had been saving for years. A week before she was to move in, she found out how badly the house was infested. The story was covered by a local paper, The Times-Picayune, and run on New Orleans Net, which documented the horrifying truth.

"Work crews opened every wall and ceiling, exposing beams, rafters and studs so badly eaten that they crumbled at a touch. The bottom 12 inches of the wooden chimney supports had been eaten away from the foundation. The termites had eaten through all but two of the house's bedrooms," the story reported. The home that looked perfect on the outside, ate through not only the purchaser's house, but also her bank account.

Don't put off what is going to be an inevitable test on your house. Order the pest inspection early and often. Watch for the local pest control service appearing at your neighbors' houses. Termites know no boundaries and can wind up at your doorstep (or in it) just as easily as at your neighbors'.

Published: June 3, 2005

The Cable Guy Could Be Costing You $8,000 in Buying Power

Housing sales prices keep breaking records quarter after quarter on a national level. The Office of Federal Housing Enterprise Oversight released the 2005 first quarter numbers, showing a 12.5 percent increase in home prices over the same period 2004 first quarter. That's the highest jump in prices since third quarter 2004 -- which presented the highest quarterly jump in more than 25 years.

The National Association of Realtors® confirmed the high-price index recently with its existing-home sales index hitting a record high in April, "defying expectations of a modest slowing trend in 2005," according to its website.

"Single-family home sales rose 4.5 percent in April to a record seasonally adjusted annual rate of 6.28 million from a level of 6.01 million in March. Last month's sales activity was 5.0 percent above the 5.98 million-unit pace in April 2004. The median single-family home price was $203,800 in April, up 15.1 percent from a year earlier," according to the site.

The cost of housing has always reflected the largest output of investment for most taxpayers. Income has not kept pace with the price of housing in many metropolitan areas, putting pressure on mortgage providers to find even more creative programs so that purchaser can buy homes that were once financially out of reach.

The fastest growing mortgage product today is the interest-only adjustable rate mortgage. It starts with a low interest rate AND the consumer has to pay back only the interest on the loan -- hanging their equity growth hopes on inflation, rather than pay down of the loan.

As home prices increase, purchasers are seeking for the ever-elusive low-payment mortgage. Even with low interest rate, low payment mortgages -- it's hard to make even that payment work. Or is it?

I have found with many buyers and readers, it's not about whether you can qualify to purchase a high-priced home, it's the comfort level of the move up in your mortgage payment. You can always go with an interest only or the revived 40-year mortgages to push down the price -- or you can start tightening the belt and develop a real, livable spending plan. A savings of a few hundred dollars per month dedicated to your housing payment can make the difference in so many ways.

For instance, $100 per month in today's low-interest mortgage programs, represents buying power of $17,135 in a mortgage payment (30-year fixed, 5.75 percent). While that might not sound like a lot, buyers have a threshold of financial pain, as it were, and it starts happening in $5,000 increments.

"I don't have a problem with a $300,000 mortgage, but I just can't see going up to $305,000 or $310,000," they'll say -- but then, they'll hang on to the $130 cable payment -- a payment which could be converted into more than $22,000 worth of buying power at 5.75 percent interest.

It's the payment that scares people. With taxes and insurance, a $322,000 mortgage at that interest rate can eek over the $2,000 mark. Which, I might add, seems to be the new threshold of pain for homeowners. I remember when people used to think $1,200 per month was ludicrous in the home buying scenario -- now, many homebuyers would give their right pinky to have such a "low" payment.

It's rare to find the homeowner who will actually borrow as much as the mortgage guy tells them they can qualify to borrow. "What? Borrow a mortgage up to $2,500 per month? Are you crazy?"

Nevertheless -- what's keeping you from purchasing your dream home? Is it the cable guy? Or some other luxury item you just can't live without?

Below, I've calculated some monthly payment items we find ourselves with and what they could purchase in regards to buying power if you were to cancel them and put them to work for you in your dream home. (While you may not be able to cancel all the services below -- you could reduce your output so your budget could reflect more real estate buying power.)

Premium Channel Cable TV: $100/month = $17,135

Lawn service: $60/month = $10,281

Cell phone (2,500 minutes family plan): $150/month = $25,703

Dinner Out ($50/week): $200/month = $34,271
With these items budgeted out or reduced, a purchaser would have up to $87,390 in purchasing power -- equaling $510 per month in extra cash to throw at a mortgage payment instead of modern-day comforts/wants. There are plenty of items you could find in your own budget that would increase your buying power.

Another thing to keep in mind about mortgage payments -- the average consumer hangs on to the mortgage for about 5 years, thus you're not making a permanent decision, it will more than likely change in the near future. And also, most household incomes increase over the years, thus, what is expensive today could be come a more palatable item to pay for in the future. Finally, real estate has consistently beat inflation and the stock market over the years -- the extra cash you throw toward it has proven to pay for itself over the years.

Published: June 10, 2005