Ø Why are building permits important? Ø How can I buy if I have a home to sell? Ø What is a back-up offer? Ø Are home inspections really necessary when buying a home? Ø What is a contingent offer? Ø Should sellers repair defects before putting their home on the market? Ø Should buyers and sellers meet? Ø What is a clean contract? Ø Is the highest price offer always the best one? Ø What is a home warranty? Ø How do I reduce my closing costs? Ø What are garbage fees? Ø Isn't asking for closing costs a sneaky way to reduce the price of the home? Ø What is a short sale? Ø What is an REO? Ø What is a Purchase Money Loan? Why are building permits important? How would you feel if you bought a house that was advertised as a having four bedrooms, three baths with a large recreation room and later discovered that technically it was had only three legitimate bedrooms, two bathrooms and a basement? This scenario is not farfetched. In neighborhoods with older homes, it's common for properties to undergo several improvements over the years – and sometimes without the blessing of the local building department.
It's easy to understand why a homeowner would decide to bypass the permit process. There are fees attached to building permits and time involved in waiting for building inspectors to show up. But, skirting permits can create a big headache if you ever intend to sell your home. For instance, in most cases the buyer of your home will have to get a mortgage to close the sale. This means that the property is likely to be scrutinized by a property appraiser sent by the lender to confirm that the buyer isn't overpaying.
Most appraisers look at the public record to confirm the number of bedrooms, bathrooms and square feet of living space. Granted, the public record is often inaccurate, particularly in areas of older homes that have been renovated over time. But, some appraisers ask for verification that the improvements that are not reflected in the public records were, in fact, done with permit. If the sellers can't substantiate that the work was done with permits, the appraiser might not give full value for the improvements. If the house doesn't appraise for the sale price, the transaction could be in jeopardy.
Even if you don't intend to sell now, you can enhance the value of your investment by making sure that your substantial renovations are done with building permits. Today's value conscious buyers are likely to pay attention to this important detail. However, buyers should not assume that an addition wasn't done with building permits just because it doesn't show up in the public record. Recently, Piedmont, Calif., homeowners put their home on the market. They had made a couple of additions to the property over the years that added 477 square feet of living space to the house. Even though the sellers had obtained building permits before they did the renovations and their property had been reassessed to reflect the cost of the improvements, the public record did not include the extra 477 square feet in the total square footage calculation.
So the seller merely went to the county assessor's office and filled out a form to correct the public record. The sellers also had a recent appraisal of the property. The appraiser included the 477-square-foot addition in his overall square footage assessment. Appraisers will often include renovations in their square footage calculation even if that figure differs from the public record figure if the improvements were of similar quality to the rest of the house.
Some homeowners do quality renovations that withstand the test of time. Others hire slipshod contractors or handymen to make improvements that don't hold up well. To ensure that you know what you're getting, check the public record of any house you're interested in buying. If you can't find permits for significant work that has been done to the property, ask the sellers for copies of the building permits.
Also be aware that sometimes homeowners apply for building permits, but never receive a final sign off on the permit. This could mean that some work might not have been completed satisfactorily. How can I buy if I have a home to sell? A rise in interest rates may cause many homeowners who have outgrown their current home to seriously consider making a move. Some own a home that's too small; others have school-age children and want to move to a better school district. Whatever prompts the desire to move, the goal is the same: make the move before interest rates increase further.
One advantage of making a trade while rates are still low is that you can afford a bigger or better home than might be possible when rates move higher. Also, lower rates make your home affordable to a larger pool of buyers, which can result in a faster sale and potentially a higher price. When interest rates rise it can dampen home sale activity, sometimes significantly.
The rationale for making a trade move before interest rates rise further is a good one. Figuring out how to make it work is another matter. The question of whether to buy first or sell first plagues most repeat buyers. There are pros and cons to both approaches.
Buyers who sell first know exactly how much money they have for a new home. They also avoid the risk of owning two homes in a changing market. However, they don't know where they're going to live or when they'll find a suitable home to buy. In a worst-case scenario, they won't find a replacement home quickly enough and will have to move to an interim rental, which can be very inconvenient.
If you buy first, you know where you're going to live and when you can move. But, the financial risk is higher because you don't know what price you'll get for your old home, or how long it will take to sell. Nevertheless, most repeat buyers prefer to buy first than to sell first. The trick is to figure out how to make it happen if you need the equity from your current home to buy the next one.
Recently, a trade-up buyer used the following strategy effectively. She had enough cash in savings to make a $75,000 down payment, which was equal to 10 percent of the $750,000 purchase price. After consulting with her financial advisor she determined that she wanted to have a mortgage on the new place of no more than $450,000. So, she was short $225,000 until she liquidated the equity from her current home.
To make up for the shortfall, her real estate agent suggested that she apply for a $225,000 second mortgage on the new home that could be paid off as soon as her current home sold. For the second mortgage, her mortgage broker recommended a low-interest-rate adjustable-rate mortgage (ARM) to keep her monthly payment as low as possible for the period of time that she owned two homes.
Although she preferred fixed-rate financing, it made sense to take advantage of the lower ARM payments for the short time that she'd keep the second loan. You must be able to qualify financially in order to use this strategy. And, if you do use this approach, make sure that the second mortgage doesn't have a prepayment penalty.
Some buy-first buyers put a home equity loan on the home they're selling to generate cash for a down payment if they don't have enough savings for a down payment and closing costs.
To minimize the risk of buying first, be realistic about the probable selling price of your current home. It's better to estimate on the low side and walk away with more cash than you expected than it is to be caught short of the money you need. What is a back-up offer? Missing out on a home you'd like to own can be heartbreaking. But, not all home sale transactions close, so you might have a second chance. Or, you could consider making a backup offer.
A backup offer is an offer that is negotiated like any other offer until the buyers and sellers reach a price and terms that are mutually acceptable. A unique term of the agreement is that it is accepted as a backup offer subject to the collapse of a previously accepted offer that is in primary position.
In an active, low inventory market, a seller might receive multiple offers and accept more than one backup offer. In this case, the backup offers would be ranked. For example, backup offer #3 would be subject to the collapse of backup offer #2 and backup offer #2 would be subject to the collapse of the primary offer.
Backup offers also come into play in softer markets. The best listings at the best prices attract the most buyer attention regardless of market conditions. Even in a slow market a prime listing can sell quickly. If you're a little late to the table and no one else beat you to it, you might look into submitting a backup offer. But, first, consider the pros and cons.
One disadvantage is that you may be tempted to postpone looking at any other listings until you find out if the first deal goes through. By doing so, you could potentially miss out on other good properties.
If you decide you want a property enough to accept a backup position, continue to look at new listings that fit your parameters. Also make sure that your contract includes a provision that allows you to withdraw from the contract without penalty at any time up until you are notified that your offer is in primary position.
Another disadvantage of being in backup position is that your commitment to buy the property could strengthen the primary buyers' resolve to continue with the transaction, even when issues come up like property defects that might otherwise kill the deal. Be aware that the sellers may have the right to renegotiate their contract with the primary buyers.
Because of these drawbacks, many buyers shy away from making backup offers. They prefer to wait on the sidelines to see what happens with the first contract. A benefit of this approach is that the sellers might be easier to work with after having had a deal fall apart.
There is, however, a risk in this approach. An attractive listing could draw serious interest from other buyers. If so, one of them might end up in backup position and preclude you from buying the property. When there's an accepted backup offer, a listing doesn't come back on the market when the primary contract fails. The backup buyer is elevated to primary position without giving other buyers a chance to buy the property.
Before deciding whether or not to make a backup offer, try to find out how much interest there is in the property. If there are other buyers serious about the property, it might be worth your while to submit an offer for a backup position. The other risk of waiting to see if the first deal collapses is that you could find yourself in competition with other buyers who are also waiting to see what happens.
A lot of time and emotional energy goes in to making any offer. Some buyers would rather save this effort for a listing that is definitely available to buy. The best stance to adopt if you're a backup buyer is: If it's meant to be, it will happen. Are home inspections really necessary when buying a new home?
Reliance on the builder's warranty is the most common reason why buyers of new homes forego home inspections. In many cases, this has proved to be a costly error. Buyers assume that all significant defects will become apparent during the warranty period. This, as we shall see, is a faulty assumption.
All new homes have unapparent defects, regardless of the quality of construction or the integrity of the builder. Simply stated, no one can build something as large and complex as a house without committing a few errors at various stages of the process. To assume that all such errors will be readily apparent is a recipe for financial loss. Some problems may reside in the attic, in the electric service panel, or high atop the roof. They may involve safety violations with a chimney installation or the grounding of electrical outlets. There might be a defect in the roof framing, the gas connection to the heater, or the site drainage on the property. A home inspector who is able to discover such conditions will enable you to take full advantage of your builders' warranty.
Professional inspection of a brand-new home is always beneficial, if performed by a truly qualified individual. Just be sure to find an inspector with many years of experience and a reputation for thoroughness.
What is a Contingent Offer? As the home sale market turns from a strong seller's market to a more normal market, we're bound to see an increase in offers that are contingent on the sale of another property. This is good news for buyers who must sell first before they can afford to buy another home or who just don't want to own two homes at once. Keep in mind that an offer made contingent upon the sale of another home still is unlikely to work in markets where the inventory of homes for sale is low and where buyer demand remains high.
Prime candidates for a contingent sale offer are listings that have been on the market for a while or listings in areas that are bloated with inventory. Here's how a contingent sale offer works. The buyers include a contingency in their purchase offer that says the purchase is subject to their existing home. If the buyers' property sells, the sale goes through. But, if it does not, the sale is off and the buyers' deposit is usually returned.
Given the choice, most sellers would prefer a non-contingent offer. It's less risky. However, there are ways to structure a contingent sale offer to make it appealing. One way is to include a release clause in the contract. A release, or kick-out, (also called a first right of refusal) clause allows sellers to continue to market their home in the hopes of finding a better offer. If such an offer comes along, the sellers notify the buyers that they must remove their contingent sale contingency by a certain date and show that they are able to close. Otherwise, they must withdraw from the contract. The sellers are then free to proceed with the other offer.
A release clause usually includes a time period--often 72 hours. But, it can be any time period that the buyers and sellers agree to. If you're dealing with obstinate sellers, you might shorten the time period to 48 or 24 hours. This means that you'd have to move quickly if the sellers exercise the release clause. You may want to line up interim financing if you're confident that your home will sell and if you don't want to lose the new home to another buyer. This way, you would be prepared to remove your sale contingency and provide proof of your ability to close.
A contingent sale offer should include a time period of the buyer's home to sell. Some contingent sale contingencies are structured so that the time period runs until the closing date. This is advantageous to the buyer, but it ties up the sellers' home without giving them certainty that the sale will close. Sellers might be more receptive if you structure your offer “happen.
“Remodeling” magazine made changes in the way they analyzed data for the 2006 report, which is thought to have contributed to the higher, yet more accurate, remodeling cost figures. Estimates of resale value are also thought to be more accurate in 2006 than in previous years. A record 2,188 members of the National Association of Realtors completed the magazine's online survey.
Keep in mind that the valuations cited in the report are based on averages. In reality, factors like cost of finishes, the condition of the rest of the house and local market conditions can cause any given remodel project to deviate significantly from the average. Still, the change from 2005 to 2006 in the national averages for remodeling costs and the amount recouped at sale is significant. For example, “Remodeling” magazine's 2005 report put the national average cost of a minor kitchen remodel at $14,913. The resale value of the improvements was $14,691, or 98.5 percent of the cost. A minor kitchen remodel consisted of updating, not redoing the kitchen from scratch. Cabinet boxes were left in place; only the doors and drawers were replaced. Appliances, countertops and floor covering were updated with similar materials.
In the 2006 report, the national average cost for the same project was $17,928, up over $3,000, or about 20 percent, from a year ago. The resale value of the improvements also increased, but only to $15,278 -- a 4 percent increase. The amount recouped couldn't keep pace with the increase in renovation costs, so the return on the investment at sale was only 85.2 percent -- a drop of 13.2 percent from a year ago. According to the 2006 report, a major kitchen remodel returns even less on the investment. The national average cost of a major kitchen remodel was $54,241. The resale value of the improvements was only $43,602, or 80.4 percent of the cost.
This report underscores the importance of remodeling with a long term perspective in mind. It doesn't make sense to embark on a major kitchen remodel just before selling your home. You'll recoup less than if you did a modified minor kitchen remodel consisting of painting and updating light fixtures, floor coverings and cabinet pulls.
In addition to national averages, the “Remodeling” magazine report gives statistics for remodeling costs and resale values for nine regions across the country. In some cases, there is quite a bit of variation from one area to the next. For example, for a minor kitchen remodel in the Pacific Region (Alaska, Calif., Hawaii, Ore., Wash.), the cost recouped was 106.4 percent. In the pricey San Francisco market, the percent recovered was 126.2. But, in the West North Central Region (Iowa, Kan., Minn., Mo., Neb., N.D., S.D.), the amount returned was only 73.4 percent of the cost.
The report covers 25 remodeling projects, and for the first time PDF files are available for the 60 cities that were surveyed. The report, as well as individual city reports, can be purchased and downloaded from www.costvsvalue.com. Before you take on a remodeling project, talk to local contractors for input on costs, and to a trusted realtor for information on how much you can expect to recoup when you sell.
Should sellers repair defects before putting their home on the market? After years of living in a home, it's easy to fall into a habit of overlooking home maintenance chores. If there's no urgency, many homeowners procrastinate. Often problems don't get fixed until a major disaster occurs like a roof leak in the middle of a monsoon.
Deferred home maintenance can become a problem, however, when you decide to sell. Most buyers want to buy homes they can move right into without having to make a lot of repairs. Sellers need to decide before they put their home on the market whether to fix deferred repairs or leave the work for a future buyer to do.
Usually sellers who have the time, money and inclination will do better on the sale of their home if they fix problems before they list their home for sale. A home that is in move-in condition is one that appeals to a broad audience of prospective homebuyers. First-time homebuyers, and buyers with busy lifestyles, often won't consider buying a home that needs a lot of work. They haven't the time or experience to deal with the problems.
The listings that are in the best condition are in the highest demand. They can attract serious attention from more than one buyer. If multiple offers occur, the price sometimes gets bid up. Regardless of whether there are multiple offers, a house that is in good condition will usually sell more quickly than one that needs work. And a quick sale often results in a selling price that is close to the list price.
Sellers who don't make needed repairs before putting their homes on the market may have difficulty selling, depending on how much work is needed. Because "fixer-upper" homebuyers make up a small portion of the homebuyer market, there will be less overall interest in the property than there would be in a similar property that is fixed up. If your home needs a lot of work, it could take a long time to sell and it might sell for considerably less than it would fixed-up. Usually the longer a listing sits on the market unsold, the lower the ultimate selling price.
Selling a home that needs a lot of work could delay the closing if the buyer's lender requires that the work be completed as a condition of granting the mortgage. One homeowner sold a home that needed about $25,000 of termite and dry rot repair. The buyer's lender said the work had to be completed by close. The buyer and seller both wanted a quick close. But the job was so extensive, and combined with intermittent delays due to rain, it took about two months to complete the work.
Most sellers can't afford to fix everything that's wrong with their home before listing it for sale. It's important to prioritize to make sure that your money is spent on repairs that will have the most positive impact on prospective buyers. Call a knowledgeable real estate agent in your area for a consultation. Complete a walk-through of your home with the agent, with pen and pad in hand. List all the improvements the agent suggests you complete before selling. Then ask him or her to order the list in terms of most and least important. Then ask how much difference it will make in terms of selling price if you complete none, some or all of the recommended repairs. The amount of time and money you have usually determines how much work gets done. Should buyers and sellers meet? Real estate agents almost always advise sellers to leave when their home is shown to prospective buyers. Buyers are also advised to conceal their excitement about the listing if they do happen to run into the sellers.
Why are real estate agents so nervous about chance meetings between buyers and sellers? Some agents worry that the buyers could jeopardize their negotiating position if the seller becomes aware of the buyers' enthusiasm for the property. In some cases, this might be so, but such an encounter could just as easily have the opposite effect.
One couple returned to see a listing they were considering at night so they could appreciate the city lights view. The seller was home. The buyers and sellers engaged in a friendly conversation, which left the seller with a positive impression of the buyers. The seller subsequently received three offers. The couple he met at the property offered the lowest price of the three. The seller wanted these buyers to have the house if they were willing and able to pay the highest price he was offered. So rather than accept the highest offer, he issued a counteroffer to the buyers who'd made the lowest offer. They accepted. If he hadn't had the personal connection to these buyers, they wouldn't have received preferential treatment.
There are many advantages to having buyers and sellers meet, but there are several issues to be aware of. Buying and selling a personal residence is unlike any other business transaction. There is an emotional component that can have an effect on the outcome of the transaction. If you were to meet the seller at the property and have an unpleasant encounter, this could hinder your chances of a smooth negotiation. Sellers who list their homes for sale with a real estate agent often do so because they don't want to interact directly with the buyers. They want to put the marketing and negotiations in the hands of trained professionals. A buyer should respect a seller's wishes if he doesn't want to meet with you until you have completed your negotiations. This includes any negotiations that might be required to resolve inspection-related issues. After that, it's usually beneficial for the buyers to meet with the sellers for the purpose of learning more about the property.
If the seller has lived in the property for some time, he has had time to decipher idiosyncrasies that could take you months or longer to figure out. Recently, a buyer learned that if she lowered a shade in the kitchen during warm weather, she could avoid walking into an unbearably hot house when she returned at the end of the day.
Make a list of questions you have before your meet with the seller. If you're buying a home with a garden, you might appreciate knowing what the seller recommends about ideal times to prune, or which plants will require more or less water when the season changes. Ask the sellers if they have any service providers—like gardeners or a handyman—that they would recommend. Write down their names and phone numbers. Contact these people as soon as possible if you want them to continue working for you. It could take you months to establish relationships with new service providers using a hit and miss, trial by yellow pages approach.
If you do meet with the sellers, it's usually best to keep your redecorating and remodeling plans to yourself. The sellers may have a strong attachment to their own taste in such matters. Try to culminate your transaction on good terms. What is a clean contract? Real estate agents often talk about the merits of a clean contract. A clean contract, or purchase offer, is simple and straightforward -- one that's not complicated by lots of contingencies, restrictions and conditions.
A contingency in a real estate purchase is something that must be satisfied in order for the sale to go through. Contingencies protect buyers and sellers, but they also provide opportunities for real estate transactions to fall apart. For example, the buyers may need to sell another property to come up with enough cash for the down payment. If their property sells, the deal goes forward. If it doesn't, the deal is off. Other common contingencies are for inspections, for financing, and for approval by other parties (like attorneys or accountants).
Less common contingencies are sometimes more difficult to satisfy. Perhaps the buyers only want to buy a property if they can modify it, or use it, for a specific purpose. For example, they might need city approval to run a day-care center. Seller contingencies can also complicate matters. For example, a property that's being sold to settle an estate might require court approval of the sale. In this case, the buyers don't know that the house is theirs until the sale is confirmed in court.
Given the emotional nature of home buying and selling, most buyers and sellers prefer the cleanest contract possible. Buyers often shy away from buying homes where the sellers have complicating factors effecting the sale, like a requirement for court confirmation. Sellers often reject an offer if it's contingent on the sale of another property. In both cases, the degree of uncertainty is high.
The ability to offer a clean contract may give you an advantage when negotiating with the sellers. This is particularly so if you find yourself competing with other buyers for a property. Put yourself in the seller's shoes. The fewer strings attached to an offer, the better the chance it has of going through. The more contingencies there are, the more opportunities there are for something to go wrong. Even though a clean contract may give you a competitive edge, you shouldn't delete contingencies from your offer if, in fact, you need to satisfy certain conditions in order to close the sale.
For example, if you need to line up a mortgage in order to close, you will need a financing contingency. If you write your offer without a financing contingency, you may risk losing your deposit money if you can't get the loan. Rather than giving up the contingencies you need, shorten the time period required for satisfying these contingencies as much as possible. A typical financing contingency is about 30 days following acceptance. If you can shorten this by a week or two, the sellers will know they have a solid deal that much sooner.
In order to shorten a financing contingency, you need to be planning ahead. Many buyers get preapproved for the loan they need. To get preapproved you must submit a loan application and documentation such as verifications of employment and down payment. You must have your credit checked. Then the lender gives you loan approval subject to you finding the home you want to buy. Buyers who aren't preapproved when they enter into contract to buy a home will need to submit a loan application within a day or so of acceptance to get approved within 2 or 3 weeks.
To make a clean offer, get your financing set up and take care of as many conditions as possible before you start negotiating. Is the highest priced offer always the best one? Some sellers have the good fortune of receiving more than one offer. It's natural in this situation for sellers to be attracted to the offer with the highest price. But, is the highest priced offer always the best one?
The offer price is important. And from the seller's standpoint, the higher the price, the better. But real estate purchase contracts are complicated legal documents and shouldn't be judged in terms of the offer price alone.
For example, sellers of a home in Oakland, California, put their home on the market at the beginning of the current seller's market. The home was in mint condition and showed beautifully. Six different buyers made offers. After careful deliberation, the sellers decided not to accept the offer with the highest price; they accepted the next best priced offer. The offer with the highest price was from well-qualified buyers, but the contract included a financing contingency and a provision that the property appraise for the purchase price. The offered price was so much higher than recent comparable sales in the neighborhood that the sellers were concerned that their home wouldn't appraise for the purchase price.
The offer with the next best price was an all cash offer with no financing or appraisal contingency. The buyers had sold a property and had the cash needed to close in the bank. These buyers also offered to close as quickly as possible. So the deal was done in two weeks. Another attractive feature of this offer was that the buyers were willing to let the sellers rent the property back for an extended period of time. This enabled the sellers to avoid a double move. They stayed in the home they sold until the found and bought their new home.
Recently sellers of another home in Oakland chose to work with buyers who didn't offer the highest price in a multiple offer competition. The home had a brick foundation and a lot of deferred maintenance. The winning buyer made an "as is", all cash offer. The other offers weren't "as is" and included financing contingencies. The sellers were concerned about the financing contingency because lenders can require that work be done before closing if a home is in disrepair.
Figuring out which offer best suits your needs can be a confusing process when you're looking at multiple offers. Some agents assist their sellers through the process by preparing a summary chart to reduce the contracts to their common elements. Such a chart might look like this. The buyers or the buyers' agent's names are listed down one side of the paper. Across the top of the paper, insert the critical contract elements. These elements might include price, closing date, amount of cash down payment, any request for a monetary credit from the seller, any work requested of sellers, rent-back option, personal property included/excluded, financing contingency (and time frame), inspection contingency (and time frame), and buyer's financial qualification (pre-qualified, pre-approved).
The profile of the buyer can be a relevant factor in considering an offer. For example, when selling an older home that will require continual maintenance, some sellers feel more comfortable selling to an experienced homeowner rather than to a first-time buyer, if they have the choice. The buyer's agent can even be a deciding factor if one agent is a professional known for getting the job done and the other agents involved in the multiple offer competition are inexperienced, or have less than sterling reputations. What is a Home Warranty? When something malfunctions in your home, wouldn't it be wonderful if you could pick up the phone, request a service call, pay a nominal service charge and have the problem fixed? In theory, this is how a home protection plan works.
A home protection plan--also called a home warranty-is an insurance policy that insures homeowners against defects in the major systems of their home. Precisely what is covered will vary from one company to the next. Most policies cover the heating, plumbing and electrical systems as well as built-in appliances like the stove, dishwasher and garbage disposal. Some companies will cover movable appliances like the refrigerator, washer and dryer for an extra charge. And some policies even include roof coverage-if you pay an additional fee.
Policy terms are usually for one year and they are renewable. The annual cost of a policy varies but you might expect to pay about $325 for a moderate-size home with central air conditioning. Protection plans are available for both single-family residences and condominiums. The plans are offered in most states.
Home protection plans are popular in the home sale industry because they provide a relatively inexpensive way to take care of home defects that develop soon after the home sale closes. For example, let's say the water heater quits working the day after closing. Depending on the terms of the purchase agreement, the seller may be responsible for replacing the water heater. A new hot water heater can cost several hundred dollars. However, if there is a home protection plan in place at closing, the hot water heater will probably be replaced for the nominal cost of a service charge. Home warranty service charges vary but they are often in the range of $30-35 per call.
Some sellers offer to pay for a home protection plan to cover the home for the buyer for one year. If problems arise during that year, the buyers simply call the warranty company and pay the service charge. The warranty company pays for the repair or replacement.
Be sure to read the policy carefully because there are exclusions from coverage. For example, pre-existing conditions are not usually covered. So if the furnace hasn't worked properly for years, it probably won't be covered by the buyer's home protection plan. Also, there are limitations on coverage. For instance, some policies offer roof coverage, but only up to $1,000 of work.
Seller coverage is also available to cover the home during the listing and sale period. Seller coverage works the same as buyer coverage except that there are usually more limitations on the coverage. For example, the furnace is usually covered under both buyer and seller coverage. But, the amount of coverage offered under seller coverage is often less than the amount that's available to the buyer if the furnace breaks down after closing.
One seller who had signed up for seller coverage was able to have some of the defects that were discovered during the buyer's inspections fixed by the home protection plan company for the cost of a service charge. This was a great deal for the seller because it saved him money and he didn't have to pay the policy premium until closing. Seller coverage is usually charged by the day. The cost varies, but it can run about 75 to 85 cents a day.
If the seller of a home you're buying does not offer to pay for a home protection plan, you can pay for one. Be sure to order it before the closing date.
How do I reduce my closing costs? Often it's easier for buyers to qualify for a mortgage than it is for them to scrape together enough cash for the down payment and closing costs. Down payment amounts vary. Usually they're in the range of five to twenty percent of the purchase price. In addition, closing costs can run another $5,000 to $10,000, depending on where you buy and the cost of your loan.
Closing costs are fees associated with a home purchase that are paid at closing. Buyers and sellers both pay closing costs. Who pays which costs is often set by local custom, but it can be negotiable. Typical buyer closing costs include such items as: fees associated with getting a mortgage, homeowner's insurance, titles and closing fees, inspection fees, proration of property taxes and transfer taxes (if there are any). One of the easiest ways to lower your closing costs is to get a zero-point mortgage. Points is the term used for the loan origination fee. One point is equal to one percent of the loan amount.
A $180,000 mortgage with a 2-point loan fee will cost you $3,600 at closing. A no-point $180,000 loan will save you $3,600 in closing costs. But, expect to pay a higher interest rate on a no-point loan. There's an inverse relationship between the points you pay and your interest rate. Another way to reduce your closing costs is to close late in the month. Lenders usually collect interest for the current month at closing. If you close on the fifth day of the month, you'll owe the lender 25 days of interest at closing. If you close on the twenty-fifth day of the month, the lender will collect 5 days of interest when you close. Closing at the end of the month can reduce your closing costs considerably if your loan balance and interest rate are high.
Asking the sellers to credit you money to pay for some of your closing costs is another way to reduce the amount of cash you'll need to close. Keep in mind that when you ask sellers to do this, it's the same as asking them to accept less for their home. For example, if you offer $200,000 with a credit from the sellers of $3,000 for your closing costs, this is the same as a $197,000 offer.
In a competitive situation, where multiple buyers are trying to buy the same home, you may have to pay full price or more to be the successful bidder. If you need the closing cost credit to make the deal work, raise your offer price by the amount of cash you need and then ask for the credit. For example, if the list price is $200,000, offer $203,000 with a $3,000 credit for your closing costs.
The property must appraise for the higher price for this to work. Also, lenders have restrictions on how much they'll allow sellers to credit for closing costs: often it's 3 to 6 percent of the purchase price. And, most lenders won't allow a credit that exceeds the actual amount of the buyers' non-recurring closing costs (costs paid by the buyers one time only at closing, such as points and title fees).
If the sellers are renting back from you after closing, ask them to credit you their rent money at closing. Clear this with the lender in advance, otherwise, the lender might require that rent be given to you later, when the sellers vacate. If the rent is credited, it reduces the cash you'll need to close.
What are Garbage Fees? Homebuyers are all too often surprised at the end of the deal when they discover they must pay new, unanticipated fees. Federal law requires lenders and mortgage brokers to disclose fees that will be charged in connection with getting a mortgage. This must be done within 3 days after the borrowers submit a loan application.
Often the final settlement statement of fees doesn't match the initial estimate the borrowers received when they applied for the loan. One reason for this is that borrowers often change their minds about which mortgage they want between the time they apply for the loan and closing.
Lenders' fees can vary significantly. Some lenders charge underwriting fees and others charge administrative or processing fees. Some charge both. Most lenders charge documentation preparation fees, but these can range anywhere from a few hundred dollars to $700 or more. There are miscellaneous fees that are charged at closing, in addition to customary closing costs like points or title insurance. These are commonly called "garbage fees." Taken one at a time, garbage fees usually don't amount to much.
For example, a tax service (to notify the lender that your property taxes are current) costs about $70, a courier fee is about $30. A notary fee might run $40, a wiring fee costs about $30 and a flood certificate (which is often required by the lender) is around $25. Some mortgage brokers charge incidental fees on top of those charged by the lender, such as a processing or document preparation fee. In addition, the escrow or closing officer might add on a few more charges for drawing, recording and notarizing documents, or to cover courier and wiring costs. Add all of these fees together and you could end up owing hundreds of dollars more than you anticipated.
To avoid surprises, make sure your loan agent or mortgage broker gives you a complete and accurate accounting of all the fees, including garbage fees. Specifically ask how much the garbage fees will run and get this in writing. If you change loans during the application process, ask for an update of the fees you'll owe. Check with the person handling the closing (attorney, closer or escrow officer) to see if any garbage fees will be charged in addition to those charged by the lender. Ask for an explanation if there seems to be a duplication of the fees charged.
Buyers aren't the only ones who pay garbage fees: Sellers pay them too. Sellers should ask their real estate agent, closer or attorney to prepare a closing cost estimate when they accept an offer to sell their home. In addition to customary closing costs like the brokerage commission, the seller's lender will charge for a payoff statement (usually about $50) and a re-conveyance fee (could be another $50 or so). Sellers also usually pay document preparation, wiring, courier and notary fees. These can add a few hundred dollars to the closing cost estimate.
It's a good idea for both buyers and sellers to ask the person who's handling the closing a copy of the final closing cost estimate as soon as the figures are available. Review this before you sign to make sure that new charges haven't mysteriously appeared. Ask your closing agent for an explanation of any new fees. If he or she can't give you a satisfactory explanation for why the fees are being charged, ask that the fees be waived. Isn't asking for closing costs a sneaky way to reduce the price of a home? Is it really a full-price offer if the buyers ask the sellers to pay for some of their closing costs? Not exactly.
Sellers are sometimes miffed when they read through a purchase offer and discover, usually in the "additional terms" section of the contract, that the buyers want them to pay for some of their closing costs. Sellers may see this as a sneaky way to reduce the price. Here's how it looks from the sellers' perspective.
Let's say the sellers are asking $200,000 for their home. The buyers offer to pay the sellers their price, but ask for the sellers to credit $5,000 to them at closing for their nonrecurring closing costs. In effect, the buyers are offering to pay only $195,000 for the home, not the $200,000 that appears in the price section of the purchase offer.
Although buyers sometimes use a closing cost credit to lower the purchase price, this is not always the case. Many homebuyers, particularly first-time buyers, are short of the cash they need to pay for the down payment and closing costs. One way to generate cash so the buyers can complete a home purchase is for the sellers to assist with some of the costs in the form of a cash credit at closing.
Lenders have restrictions on how much sellers can credit to buyers at closing. The amount varies with the lender, but it's usually in the range of 3 to 6 percent of the purchase price, or $6,000 to $12,000 on a $200,000 purchase price. Most lenders will only allow a credit for the buyers' nonrecurring closing costs. Nonrecurring closing costs are paid on a one-time-only basis at closing, like payments for title insurance and loan origination fees. Lenders usually won't permit credits for the buyers' recurring costs, like mortgage interest and hazard insurance. There are some lenders, however, that will allow credits for all closing costs.
A credit from the seller to pay for the buyers' nonrecurring closing costs can't exceed the actual amount of those costs. The lender might allow a credit of up to $6,000, but if the buyers' costs only total $5,000, the maximum the sellers can credit is $5,000.
The way an offer is presented to a seller can influence its chance of success. To overcome any potential resistance the sellers might have to a request for a credit, explain how the credit works before discussing the offer price. This way the sellers are less likely to be disappointed when they discover the offer is for less than the offer price indicates. Buyers who need a credit in order to buy may find themselves at a disadvantage if they're making an offer in competition against other buyers. To be competitive in this situation, it may be necessary to inflate the offer price to cover the amount of the closing cost credit.
For example, let's say the property is listed for $200,000 and you need a credit of $5,000 to help pay for your closing costs. You can increase the offer price to $205,000 and ask the seller to credit $5,000, which is effectively a full-price offer of $200,000. For this strategy to work, the property must appraise for $205,000.
A credit can also be used to resolve inspection issues that arise during the sale. Although lenders usually don't let sellers credit money to buyers for property improvements, they do allow credits for closing costs. The money the buyers save on closing costs can be used later to make improvements. What is a Short Sale? A short sale is a home being sold by a seller that does not have enough equity in their property to pay off all encumbrances after paying all expenses of sale. In other words, the seller owes more than the net value of the property. To sell short, the homeowner generally needs to be in real financial trouble. Lenders generally must perceive that forclosure is inevitable before they will agree to a short sale. If the seller has equity in any property such as a car, RV, investment property, stock, bonds or other assets, the bank will refuse to participate in a short sale. A short sale is a priviledge, not a right. What is an REO? REO is an acronym for "Real Estate Owned" and is a bank owned property. The bank usually acquires title to their REO properties through a foreclosure, however they may also be acquired through other means such as a deed-in-lieu of foreclosure, tax sale or corporate housing. In California, foreclosure is commonly handled through a trustee's sale (not court action) where the property is sold to the highest bidder in an auction open to the public. At the trustee's sale, the foreclosing lender may make a credit bid in the amount of its unpaid debt plus foreclosure costs, but the trustee typically requires any other accepted bid to be paid in the form of all cash or cash equivalent. Because all cash is required at a trustee's sale, it is rare that anyone outbids the foreclosing lender. Once the lender acquires title to the property by trustee's deed through the auction, the property becomes part of that lender's REO portfolio. What is a Purchase Money Loan? Many homeowners are facing foreclosure and attempting a short sale of their home to reduce the damage to their credit. Foreclosure will result in four years to gain back credit recovery compared to two years after a short sale. Currently, California law specifies if the homeowner defaults on their mortgage loan that was used to purchase their home, "purchase money loan", the liability is limited to the value of the home only. Therefore if the home forecloses, the lender cannot demand any more from the homeowner other than the home itself. However, should the homeowner refinance the original loan, the law no longer applies. Thus, if the home forecloses on a refinanced loan or a line of credit used to improve the home, the lender can sue the homeowner for the balance (deficiency) of the loan amount greater than the value of the property. For example, if the homeowner's refinanced mortgage was $350,000 and the home foreclosed at a value of $250,000, the former homowner could be liable for the $100,000 deficiency. This is also true on a short sale with a refinanced mortgage or line of credit used to improve the property. |