Up to $100,000... but there's a catch

When a real estate client came to me all pumped up because his Credit Union was offering to pay up to $100,000 of his closing cost, I thought we should sit down and review the typical expenses for a home buyer worksheet again.

I’m sure you can understand why he was so excited since $100k is considered a big chunk of change… even for those in the top 1%!

$100,000 is a rather excessive number

Our first stop was to look at their online estimate and then the fine-print in the offer.

Their online “closing cost estimator” had a nice breakdown and their estimate was reasonably close to my estimate.

In his case the estimated amount was about $14,500.

The fine print states:

Closing cost offer only good for 5/5 Adjustable Rate Mortgages (ARMs)**. You must use one of our preferred title companies to get closing cost credits. Closing cost offer is limited to $100,000 per loan. If application is withdrawn or does not close, the borrower pays all applicable fees. For New York properties borrowers are required to pay title insurance premiums and may use any title company to obtain the closing cost credit of up to $100,000. Includes lender’s fees, title fees, recording fees, and recording/transfer taxes. We do not pay optional owner’s title insurance.

One of the first items that I cover with my Vienna home buyers and sellers are typical transaction expenses. Spending time going over my cost estimate worksheets always puts the process in perspective and answers some tough questions.

But, you have to agree, an offer to pay $100,000 is going to get anyone’s attention.

Developing a winning negotiating strategy is part of the reason why I cover expenses, because you can include having the seller pay some of your closing costs in your offer to buy their home. This is perfectly normal in the Northern Virginia real estate market where homes are expensive (our average price in 2011 was $483,160) but, remember, you can only use the amount as allowed by the lender’s predetermined “normal” transaction costs.

In my real estate practice, having a consistent negotiating strategy is essential for my client’s success. But when this lender then suggested to my client that he ask the seller to give a closing cost credit then steam started to come out of my ears. Wait a minute, didn’t their advertising get him interested in their program because they were willing to pay the closing costs?

And now they are suggesting he get the seller to pay some… ?

wait a minute, this is BS.

This is a fairly complicated switcheroo-ski if you ask me. Keep in mind, if there is a seller credit then that amount will be used first before the lender steps up with their $100,000 credit. That credit goes to closing costs and not to escrows, pre-paids or the down payment. If the credit is too much then the seller gets to keep her funds.  In this case, I recommended to remain focused on the Sales Price without the distraction of a seller credit.

Besides wanting my clients to get treated fairly, I also want them to get the best deal and maximize their mortgage options. As a licensed real estate agent, I understand the FTC regulations restricting real estate agents about giving mortgage counseling… but I will do my best to point out a rotten egg if I smell one.

Have you reviewed the typical expenses of your real estate transaction?

Related articles

• Price is not all that matters in real estate sales (reallyhome.wordpress.com)
• C is for Closing Costs! (realtorkaera.wordpress.com)
• Bad News for Vienna Real Estate (dougfrancis.com)
• When Should You Respond to Counter Offers? (dougfrancis.com)

About 30% cash buyers

Condo buyers that pay cash are typically savvy real estate investors looking to cash in on the current low prices with plans to rent out the properties. Although there are many places where that plan is a good bet, places such as Reston, Virginia may be a whole other story.

You see, Reston is an ideal location for investors because a Metrorail line is being built from Reston to Washington DC. Reston also has an impressive workforce clustered around the Town Center and Dulles Corridor – so there is continuous demand.

This scenario sounds pretty good to me as well, but there area lot of people who want to get on that train too and are willing to do anything to get onboard.

Are you missing the big picture?

Owner occupants getting loans for condos have to jump through some extra hoops meant to protect (the lender) from placing a residential loan in a “commercial” building. A commercial residence is defined as having a larger ratio of non-owner occupied units to owner occupied units. Also, they tend to look at F.H.A. approvals and other financials.

Last week’s conversation on CNBC about real estate and cash buyers really got me thinking about what I was seeing right here in the Reston condo market with cash buyers (investors) often out bidding owner occupants.

Luckily, condo buyers paying cash don’t need all that nonsense!

Again, about 30% cash buyers

Well, it isn’t all nonsense…

So what is the Investor Ratio?

Although you may be well intentioned as a real estate investor, it is important for you to understand how many other well intentioned investors are in your building. This figure will be especially important when you plan to sell (cash out) and buy something in the future. If the ratio is too high then it may be difficult for perspective buyers who need financing.

Is the property F.H.A. approved?

Although the F.H.A. has made it tougher to maintain approval, many condos that had approval have not renewed their status. Again, this may factor into your plans when you plan to sell (cash out) and put your cash into another investment. Another investor may  impact your condo’s resale market if one investor owns more that 10% of the units.

By the way, take a look at those two charts and notice how few FHA loans were placed each month. To check on approvals, click here for F.H.A. and here for Fannie Mae lists.

How solid are the condo’s cash reserves?

Although you are going to pay your monthly condo fees, you need to know how the finances look right now because, if 10% of the building is behind on their payments, then you may want to reconsider the building. It is a slippery slope when that badly needed cash flow dries up and reserve requirement aren’t being maintained. So, examine the financials.

Read the Condominium Disclosure Documents

These will give you plenty of financial details, but look to see if there is a self imposed cap on rental properties. I know one condo where there is a very restrictive cap on rentals – at 20%. Better yet, they are at the max already so you will need to apply for a spot when it comes available. Sorry, it’s in the bylaws!

Have an exit strategy

Remember that getting your money from this type of investment is not easy, especially if you are buying it with partners. This is a trend I’m seeing since so many people are earning 0% in their money market accounts and the cash flow from a rental is appealing. It is your principal that is locked up until you sell. If you don’t have a plan then you may get stuck with a lemon for a long time.

Related articles

• Video: Toronto becoming a town of renters as investors dominate condo market (moneyville.ca)
• When Should You Respond to Counter Offers? (dougfrancis.com)
• Are School Ratings part of your Home Search? (dougfrancis.com)

The outside fan creates negative pressure

It is not a requirement that you test for Radon when you put in an offer to buy a home in Northern Virginia, but it is probably a good idea. The Radon Inspection Contingency in the NVAR Sales Contract puts some structure into getting a “short-term” radon test done on any home to make sure the levels of Radon on the lowest level of the home are below the 4.0 pCi/L level.

The 4.0 pCi/L level was a target set by the U.S. Congress for indoor air quality, and the U.S. EPA enforces that mandate. Yes, other countries may have set higher levels as “safe”, but it is very easy to reduce Radon levels in homes permanently. Radon is a radioactive gas of decaying uranium that is found in virtually all soil. It can collect inside a home after penetrating the structure through cracks in the foundation, and scientific studies have linked Radon to lung cancer.

This is not only an issue for older homes as clients with luxury homes, some only a few years old, have had elevated Radon levels above 6.0 pCi/L. Any home can have elevated levels of Radon.

Radon Reduction Devices are Inexpensive

A recent Radon test on a home that a client bought in Vienna, VA cost $140. The 48-hour test showed a radon level of 4.4 pCi/L in the basement and the home seller agreed to install a remediation device. Radon Abatement Technologies of Vienna was called to install the device  (cost about $850) known as a Soil Suction Radon Reduction System in the basement. This device was professionally installed near the sump pump system and then vented outside where the pressure fan was installed. The home was re-tested by Accurate Radon Testing Inc. and the Radon level was reduced to 1.7 pCi/L.

A Radon Inspection Contingency is usually 7 to 10 days

Fluid should not be level

When I am out with clients looking at homes, I always stop and explain radon devices when we see them already installed in the basement of a home. Although you can typically hear the ultra quiet fan, there will be a pressure gauge or manometer that demonstrates the pressure difference. These devices are guaranteed to reduce radon, but to be absolutely sure that the Radon levels are low, you should consider doing a long-term test of 90 days. If your results show an elevated level then contact the installer identified next to the manometer to evaluate the existing system.

You can get information from the EPA in their Consumer’s Guide to Remediation or on the EPA web site.

Related articles

• Yes, it’s your Second Showing (dougfrancis.com)
• Vienna VA Real Estate Stats | 2011 (dougfrancis.com)
• Adding a Deadline to Your Real Estate Offer (dougfrancis.com)
• Selling Your Home… have an FHA Mortgage? (dougfrancis.com)

Image via Wikipedia

Did you enter a specific school into your search criteria and still missed that hot new listing last weekend? Aren’t those “search sites” supposed to make it easy for the consumer you?

So, last weekend I was checking the MRIS database and noticed a Vienna VA real estate listing that didn’t have any schools identified. Since I keep an eye out for my clients, I immediately recognized that it fed into a specific elementary school that some clients really wanted… but there haven’t been any houses available. (really)

Adding school info is optional

To make a long story short, we met up and took a look on Sunday. On Monday we met to put together an offer and beat another offer that also came in on Monday (not on price but an “X-factor“).

Back to the school issue.

Public School information is added by the listing agent in our MLS (MRIS)… only if they choose to. Surprised? Well if you were the seller and knew that the elementary school was highly sought after, then wouldn’t you insist that your real estate agent leverage that fact. Isn’t that why they have SOL tests? Don’t those test scores help increase property values, if you are a buyer?

But my train of thought was interrupted when a Twitter friend responded to my tweet for input yesterday, and tweeted back that she rarely adds school information because, where she works in Fredericksburg VA, they change the boundaries almost every year. Well, there goes my theory about the SOL tests!

Her reasoning is simple: if the school boundaries are changed then the buyers may be upset because their home is no longer in the Harvard ES district. Well then, I guess that I can understand her point because I wouldn’t want that buyer’s lawyer calling me up either.

Another Twitter friend, Jeremy Hart, tweeted back that his MLS in Blacksburg VA requires members to enter the public school information for each house. Well, that make sense to me too.

Home buyers need to do school research themselves

• What County School System is the home in?
• For example, Google “Fairfax County Public School Boundaries”.
• At the school system web site, enter the property address.
• Contact the school if there is a question about changes.

So what are Northern Virginia real estate agents supposed to do? Maybe just list the price, items that convey, add some photos and hope everyone will figure it all out on their own. But what does a real estate agent do about that client who insists on adding “walking distance to Harvard ES” to the listing?

Easy… add a disclaimer: “Information provided is believed to be accurate…”

Related articles

• Vienna VA Real Estate Stats | 2011 (dougfrancis.com)
• Home Energy Score Cards – Should a MPG like System be a part of Real Estate? (agentgenius.com)
• Reddit asks how to find a Realtor – answers reveals hidden advice for agents (agentgenius.com)

And when they drilled down, they found that my real estate blog was more informative and interesting than the other canned crap marketing blogs that they had found. Luckily, Northern Virginia has a lot of people thinking about real estate and they give me most of the ideas that I blog about.Yes, it’s like Seinfeld… “There’s a show!”

My content often reflects what is going on here, right now!

Online REALTOR reviews have really come of age over the past year, and the time has come for me to shamelessly share what I see out there on Zillow.com and IncredibleAgents.com (about myself that is).

Here are two quotes that recent clients left at IncredibleAgents.com , an up and coming site which seems to be national. I believe they must take agent licensing info from the public records and create a page. Having found it myself in a Google search, I did fill in my usual propaganda but my clients added the comments.

Peer Reviews and Recommendations are trends Amazon.com pioneered

When I mentioned to a Internet/blogsales guy from Salt Lake City recently that we have over 13,000 REALTORS in Northern Virginia, he seemed surprised that so many people would be real estate agents in 2011 and still have a 2003 web site. They fact is, REALTORS are sales people, customer service people, marketing people, negotiators and, somewhere down the line, computer people. So I suggested he read my FAQ page or About Me page to understand where I am coming from online in 2011.

For people who don’t want to write comments, then there are sites like MountainofAgents.com where people simply click to rate me. Seems “thin” to me but someone thought it would be a good idea.

I really haven’t pushed my past clients to write testimonials online but I probably should. This client (below) wrote a review on Zillow.com because her agent in Maryland had asked her to write one for him. Confidentially, I know she likes me more than him. People can typically tell a story about the home buying or selling experience in 100 words or less, and consumers who don’t know me yet can get the gist about who I am and how I work with people.

Sorry that the print is so small, but you can go to the sites and read the reviews yourself. What do you feel about Realtor reviews online? I feel that we have all grown accustom to seeing a review either on Amazon.com or BestBuy.com for any product we are planning to buy. It is kind of where people are getting insight these days… peer recommendations.

Don’t you Google almost anything?

Yet another web site holds client recommendations too. That site, LinkedIn.com , is more of a business networking platform rather than a real estate specific web site.

If you are looking for a REALTOR in McLean, Vienna, Oakton or who covers most of Northern Virginia, then take a look at my Online Reviews and tell me what you think. I look forward to hearing from you!

UPDATE: After I wrote this blog post, there was a flurry of articles about real estate agent review site and I stumbled upon a site that puts reviews in one place. Wow! My little Vienna real estate blog seems to have moved the conversation along… take a look now! What do you think?

Related articles

• Will Your Real Estate Offer Make the Cut? (dougfrancis.com)
• Looking for a Good Realtor in Northern Colorado? (mygoldstargroup.wordpress.com)
• Sweating the Appraisal Contingency? (dougfrancis.com)
• Zillow Adds Real Estate Agent Ratings (webpronews.com)

Image by Vincent van der Pas via Flickr

If you are planning to make an offer on real estate then remember that real estate offers must be in writing to be enforceable. Period!

Although the real estate sales contract process is different around the U.S., having the terms on paper is the essential first step. The contact price, financing terms, closing date, and contingencies build a framework to achieve the common objective of selling the home.

One addition should be a deadline for the seller to respond to the buyer’s initial offer. In Northern Virginia, the Regional Sales Contract does not have boilerplate language that requires either party to respond during the offer/counter-offer process. The contingencies have time frames, but until the contract is “ratified” neither party feels the pressure of the clock.

Yes, a deadline for your real estate offer is important

Deciding on a deadline will depend on your local real estate market. For example, right now the Vienna, VA real estate market for detached homes is “hot” (March 2011) with home buyers competing for homes. This is because of a supply shortage in the 4 bedroom, 2 bath, 2 car garage category. Yes, we are looking at a “seller’s market” where home sellers have a certain amout of control over the negotiation process.

“Submit Final & Best Offers by 9 PM on Tuesday”

In contrast to my local market, there are real estate markets in Florida where there is an ample supply of attractive homes for sale. This is a classic “buyer’s market” where a well qualified home buyer can call the shots.

In my opinion, common sense requires that any offer should be responded to in a “reasonable” time frame… but that depends on the local absorption rate. If new listing are getting offers the first weekend then getting a response may be withing 72 hours. But this scenario may give the seller an impression he can “shop the offer” to try and milk it for a better one, a real gamble because most buyers hate bidding wars and may pull their offer if they feel exploited. If you feel this case, modify your offer with a firm deadline, like Thursday March 3, 2011 @ 5:00 p.m.

What is the absorption rate in your local real estate market?

In my experience, offer deadlines don’t work for short-sales or foreclosures. Hey, you are dealing with a bank… I think that explains it well enough.

If you don’t put in a deadline and there has been no response from the seller, then ask to get acknowledgment that your offer has been presented to the seller. With so many people traveling these days, you may find out that the seller is on a cruise ship in the South Pacific, or dealing with an ailing spouse or is trying to reach his brother (the joint owner) who lives in Montana. There are many “reasonable” scenarios and you will have to judge the validity of each.

So, consider putting in a deadline depending on your current real estate market or background information that your agent has discovered. You can always adjust dates in an offer, withdraw an offer, or know that once the offer deadline expires you can pursue another property.

Related articles

• Will Your Real Estate Offer Make the Cut? (dougfrancis.com)
• Sweating the Appraisal Contingency? (dougfrancis.com)

Lenders must be FHA approved to do FHA loans

If you are currently in the market to buy a home and plan on using FHA for your mortgage financing, keep in mind that the annual mortgage insurance will be higher for loans assigned case numbers starting April 18, 2011.

Local mortgage guy Todd Marumoto of Intercoastal Mortgage in Fairfax, VA sent me an e-mail update about this increase along with some examples of how it will impact the monthly payments of FHA borrowers. The trade off is simple to understand because FHA loans provides low down payment loans to qualified borrowers.

Todd said:

Please be aware FHA is increasing the annual mortgage insurance premium by .25% effective with FHA case numbers assigned on or after 4/18/11.  The upfront premium will remain the same.

Mortgage Insurance Premiums.
Annual Premium Loans Terms > 15-yearsLoan-to-Value

Current and Starting  4/18/11

<=95.00%              currently .85%  increasing to 1.10%

>95.00%                 currently .90%  increasing to  1.15%

How will this impact your monthly mortgage payment?

Todd’s example:

Sales Price:                  $300,000                       $300,000

Max Loan (96.50%)        $289,500                       $289,500           (before upfront mortgage insurance)

Annual Premium            .90%                             1.15%

FHA Annual MIP            $217.13/mo                   $277.44/mo

Change in payment        n/a                                $60.31/mo

Contact your local mortgage professional today to get specifics on what it takes to get assigned a FHA case number before the deadline.

There is more behind every door

Every home buyer tries to figure out what it will take to buy the home that they have decided to make an offer on. Determining the right price, or how much wiggle room there is, is the bottom line here for everyone from the first time buyer to the savvy investor.

If you are sitting at your kitchen table pondering this question, then it is time to consider some subtle nuances that I feel are essential for success. At least in the Northern Virginia real estate market where most sales aren’t foreclosures, having a “global view” will give you a greater opportunity to succeed in your negotiation.

Not every offer gets the house

Doing some homework on the house you want to buy is essential, and it is important you do these things quickly and methodically to help you form a unique negotiating strategy. There are many X-Factors in real estate, so, the more you know about each home you are interested in the better. Some facts a clear, but sometimes you will need to infer or form an opinion of what the seller is hoping to achieve.

Some subtle real estate X-Factors:

• How does the house compare to the competition?
• How long has the home been on the market?
• How long have the sellers owned the home?
• Are there any offers already on the table?
• When do they prefer to move?
• Did you meet the seller?
• Why are they moving?
• Is the house occupied or vacant?
• What is the overall condition of the house?
• Is it owner-occupied or are tenants living there?
• Have they already adjusted the listing or asking price?

Wait, but the comps say this home is worth…

There are always facts that people use to determine values, but facts in real estate sales are only so useful. For example, a seller knows that the market value of her home is $300,000 but prices it at $285,000 looking for a fast offer. It is a nice home with an updated kitchen, two year-old hardwood floors and upgrades that will jump out to any home buyer that has been watching the market. I have seen this type of scenario drive statistics focused clients crazy because that new, under-priced listing just did not make sense.

“Isn’t there supposed to be a negotiation, where I make a low offer?”

“Well, not always.”

“Huh?”

Unless you are buying a new home from a builder (a whole other scenario), it is essential to remember that most folks have never sold a home before or have experience with one, maybe two real estate sales often spread out over decades. The seller may have raised a family there, bought it before they married, or cared for a deceased spouse there. Emotions often come into play for both sellers and for buyers.

So consider more than the cut and dry facts, the assessment, or the Zestimate. More than recent local home-sales data, school information, walk-scores, or location.

And always know that, even when you put together a perfect offer, another eager home buyer may get the house for an unexplainable reason. And that is the real estate X-Factor.

Related articles

• Real Estate News: Home Sales Gains Seen (blogs.wsj.com)
• How to Get Your Home Ready to Sell in 30 Days (dougfrancis.com)
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Image by rmanoske via Flickr

When I review estimated closing costs with home buyers, we always spend time looking at Title Insurance because it is typically one of the largest expenses on the worksheet. Since most people buying real estate are going to have a mortgage, title insurance is going to be a requirement of the lender if you want them to provide the loan. Title insurance is purchased at the time of closing/settlement.

In Northern Virginia real estate, it is customary that the home buyer purchases the title insurance policy. In some states the cost is split between buyer and seller.

Now, let me be clear that I am not an attorney nor am I affiliated with a Title Insurance Company, I am a licensed real estate agent who has seen the benefits of having a policy in hand when transactions are happening. One example was when clients were selling their home and the new title search uncovered an unsatisfied lien from 1969… three owners ago! When they had bought the house I recommended they buy “owner’s coverage”,  so they provided the title insurance policy and their house sold on time. There was another issue when a mortgage lender had not recorded as Certificate of Satisfaction when the owner had refinanced the home… again, the title insurance policy saved the day.

I advise that all my clients buy an “owner’s policy” which includes the lender’s required coverage too. It typically costs just a few hundred dollars more but is essential just in case a future issue emerges after closing on the house.

• Home buyers paying cash are also advised to include a title insurance policy.
• New home buyers are advised to buy a title insurance policy that includes Mechanic’s Lien coverage.

My Cost Estimate for Virginia: I multiply $4.90 x each $1,000

So, if the sales price is $450,000 then the estimated title insurance will cost $2,205.

If the property you are planning to buy was bought within the last four years, try and get a copy of the seller’s existing title insurance policy to provide to your closing attorney or title company. With that in hand, you should get a good discount because the policy will qualify for a Re-issue Rate saving around 30%.

Home buyers should also ask the title company to ask what the cost difference is between a buyer’s standard policy and an enhanced policy.

There are plenty of web sites that will explain to you the many reasons behind the importance of having title insurance policies on your home. For more information, The American Land Title Association (ALTA) provides consumer information on their web site.

Related articles

• A Look at Title Insurance (stroupecondoblog.com)

It seems like every week there is an announcement that home mortgage rates are at an “all-time low”, but this weekly headline is starting to get a little stale for most home buyers who are locking-in the mortgages as late as possible before going to closing. The “rate float option” gives home buyers the option of risking today’s low rate with the expectation that they will lock-in at a lower rate in the future.

This isn’t about mortgage rates

Well that is almost true, because it is important to point out that we are looking at financing a long-term “investment”. Your mortgage is a debt and the interest that you pay is an annual tax deduction.

If you are looking to buy a home then you really need to examine how long you will live there, or what your life will look like in five or ten years? Yes, this is time for long-term planning, to think big, and to consider a house that you will still fit in ten years from now. With rates this low, you are able to afford a better house than you would have been able to buy two years ago

“… own the best house you can afford” – Life’s Little Instruction Book

You are probably a wiz at this by now, but let’s assume you are getting a mortgage for $417,000 on a cute Vienna VA house and hope to lock in a 30-year rate, do you know how much the interest payment will be every month?

Interest Rate x Loan Amount = Annual interest ÷ 12 = Your Monthly Interest

4% x $417,000 = $16,680 ÷ 12 = $1,390 a month in interest

4.5% x $417,000 = $18,765 ÷ 12 = $1,563 a month in interest

5% x $417,000 = $20,850 ÷ 12 = $1,737 a month in interest

6% x $417,000 = $25,020 ÷ 12 = $2,085 a month in interest

What I am suggesting here is that you buy a home for a life that is bigger than your life is today because long-term money is so cheap. Yes, I am suggesting skipping that starter home. These low rates should really make you consider buying as big a home as you can afford keeping in mind your future needs and quality of life.

You may never move again

• Write down where you see yourself in 2020
• Take a look at local communities, any future plans?
• Bike Trails, Schools, Restaurants, Community Events, Employers
• Are there airports, trains, museums, local history
• If you had to move, how active is the real estate market?

Related articles

• You: Mortgage rates fall to another record low (washingtonpost.com)
• UPDATE 1-U.S. mortgage rates at new record lows-Freddie Mac (reuters.com)
• U.S. 30-year mortgage rates fell in week – Zillow (reuters.com)