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When
buying a home, you can learn from the knowledge and skill of a Real
Estate Agent.
Buying a home is
probably the biggest investment you will make, with long-term
financial ramifications. It calls for many informed decisions and for
good advice from a real
estate professional.
What can a
Real Estate Agent do to help you buy the right home for you?
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They will help you
determine how much home you can actually afford. Often, they can
suggest additional ways to accrue the down payment and explain
alternative financing methods. They can also introduce you to a
mortgage counselor and arrange to have you "pre-approved" which can improve your negotiating position and enable you to achieve
your home-buying objectives faster and with less stress.
- Providing "client-level services", they can work for you as a buyer's
agent and help negotiate the best price and terms for you. Or, they
can serve as a seller's sub-agent (or disclosed dual agent), acting
as a liaison between you and the seller to present offers and
counteroffers until an agreement is reached.
- They will help
you work out a realistic idea of the home best suited to your needs -
size, style, features, location, accessibility to schools,
transportation, shopping, and other personal preferences.
- They have
access to a listing of all available homes in the multi-list system,
can evaluate them in terms of your needs and affordability, and will
not waste your time showing you unsuitable homes.
- They can often
suggest simple, imaginative changes that could make a home more
suitable for you and improve its utility and value.
- They can
supply information on real estate values, taxes, utility costs,
municipal services and facilities, and may be aware of proposed
zoning changes that could affect your decision to buy.
- Although the
law does not normally require an attorney to review documents or
oversee real estate closings, they can provide you with a list of law
practitioners to choose from if you would like to use the services of
an attorney.
- They can help
familiarize you with the closing process and they will obtain closing
figures in advance of closing for your review.
- They can
provide you with a list of qualified home inspectors, pest
inspectors, surveyors, and help to coordinate inspection appointments.
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Top 10 Tips to
Successful Home Buying
Tip #1:
Research Is The Key To Discovery
Home sellers won't
call you with an offer to buy a maintenance-free home with a
wonderful mortgage. You have to find the gems yourself! Only by
reading available materials, talking to friends and experts, and
spending time looking at different homes, schools, and neighborhoods
will you end up with your American dream. Avoid the nightmares by
learning how best to buy and maintain a home.
Tip #2:
Make A Plan And Get Pre-Qualified
Every important
decision needs to be clearly thought out. Developing a home buying
plan can help you focus on the important factors and organize the
entire process. You may even want to use a binder with sections on
house hunting, home financing, service providers, etc. Loan
pre-qualifying helps you determine the home price you can afford and
presents you as a genuine prospect to the seller. A lender typically
uses the 28% formula (your monthly mortgage can't exceed 28% of your
monthly income) in approving your loan. Planning your actions and
getting pre-qualified will keep you out of the panic mode and allow
you to take advantage of opportunities. A thorough plan will save
both time and money!
Tip #3:
Value, Value, Value
The days of 10-30%
annual appreciation have passed. Homebuyers in the 1970's benefited
tremendously from what seemed like ever appreciating home prices.
Nowadays, you're looking at slow growth while guarding against the
possibilities of falling prices, skyrocketing ARM rates and corporate
layoffs that can dramatically affect your home values. The classic
rule of buying the worst house in the best neighborhood still
applies. If you buy with an eye towards improvement, you can
customize the home to fit your needs. The saying, "make money
buying a home, not selling one," should keep you focused on the
long-term importance of the purchasing price.
Tip #4:
Create A Top 10 List Of Amenities
When shopping for
a home, list the features (fireplace, fenced-in yard, new appliances,
etc.) that are most important to you in deciding on which home to
buy. Establishing "your criteria" early on will save time
shopping for inappropriate homes and may keep you from buying a home
on a whim. As detailed in Tip #3, your top reason for buying a home
should be the value you are getting. Some of your top 10 amenities
should logically be sacrificed if an incredible value is available.
Tip #5:
Fixed vs. Adjustable Rate Mortgages
Which type of loan
fits your particular needs? If this will be your first home or a "transitional home" -- one you plan to own for a short
time, an ARM may be the best type of loan. If it's going to be your
dream home or one you plan to raise a family in, then you may want
the stability of a fixed rate mortgage. If you choose an ARM, the
index should be based on the Cost of Funds Index if rates are
increasing, and Treasury Bills if they are decreasing. The COFI's are
less volatile over time than T-Bills; make sure the teaser rate is
understood and what the real rate would be.
Whichever loan you
choose; make sure that you scrutinize all the closing costs. If you
are required to have a mortgage escrow account and private mortgage
insurance, make sure you understand the terms and cancellation
procedures (your Real Estate Agent has publications to assist you).
Also, make sure there are no prepayment penalties so that you can
utilize an accelerated mortgage plan. A good mortgage reduction plan
can save you tens of thousands in interest costs, and shorten your
loan term, with only small extra principal payments. If you
experience negative changes in your job, health, or marital status,
you can revert to the standard payments in your mortgage contract.
Tip #6:
Sign A Contract That Protects You
Make sure that the
contract you put on a house allows you to arrange financing, inspect
the home and negotiate any problems that you uncover. Ensuring that
the contract you sign will minimize potential legal battles will let
you swim in your new pool with your family and neighbors instead of
with the sharks.
Tip #7:
Put Yourself In The Seller's Shoes
You are about to
make one of the most important decisions that will affect both your
life and the life of the seller. If you take time to understand the
reasons the seller bought the home, their reasons for selling, and
the home improvements they have or have not made, you'll be in a
better position to evaluate the home and negotiate a better deal. In
the end, the home buying process excludes the professionals and comes
down to the individuals buying and selling the home. A closer look at
the seller may help you in deciding whether and for how much to buy a
particular home.
Tip #8:
Develop A Mortgage Shopping Chart
One of the biggest
decisions to make before putting a contract on a home is how to
finance the purchase. There are 10,000 lenders competing for your
mortgage business. The days of simply walking into the community bank
and negotiating with the loan department manager are over. Today, you
can apply for a loan over the Internet or even use a mortgage broker
to shop for your loan with hundreds of lenders. When choosing a
lender, you want to avoid apples to oranges contrasts by comparing
fixed rates to fixed rates, not fixed to ARM's. Create a chart that
lists different types of loans, fees, and at least five mortgage
providers (including a mortgage broker).
Tip #9:
Get A Quality Home Inspection
Although it is
hard to believe, more people pay for inspections before buying used
cars than when making the biggest investment of their lives - their
homes. Paying for a qualified home inspection before you buy a home
isn't just spending "a little extra" for peace of mind;
it's absolutely essential for anyone who doesn't want to spend
thousands of dollars for repairs.
Tip#10:
Peace Of Mind: Home Protection Plans
To protect both
you as a buyer, as well as the seller, it is a good idea to purchase
a home protection plan. What exactly is it? A home
warranty, or home protection plan, is a service contract, normally
for one year, which protects homeowners against the cost of
unexpected repairs or replacement of their major systems and
appliances that break down due to normal wear and tear. A
negotiable contract between the buyers and sellers which does not
overlap or replace homeowner's insurance policy, this type of
warranty can save the new homeowner lots of headaches, as well as put
seller's fears to rest. The warranty covers mechanical
breakdowns, while insurance typically repairs the related damage. For
example: if a hot water heater burst and destroyed a wall in your
home, the warranty would repair the water heater and your insurance
would pay to fix the wall.
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Sometimes, life
just hands us the inevitable: just when everything seems right with
your home, something happens and you have to sell your dwelling. No matter what your reasons are for selling, remember that now is no
time to dawdle, the process of preparing a home for sale can take a
month or more. So, here's how to start:
1. Take
a Fresh Look at Your Home
Your home looks
great to you, but a buyer wants to see it since he and his family
will be living in it -- so take fresh look at your dwelling. Hop in
your car, drive around the block, and then scrutinize your home as a
prospective buyer will see it for the first time. First, consider
what's called "street appeal;" does it need washing or
painting? Does the driveway need repair work? Is the landscaping in
good shape? Remember, be very critical; your buyer will be.
Next, pull into
the driveway and take a good, hard look. Is the yard neat and
trimmed? What about the view from the front yard? Then, walk inside
and size up the interior as though seeing it for the first time. Take
a tour and imagine what your real estate agent might say about each
room, look into cabinets, open doors, check out the bathroom.
Then, make a
mental note of the things that might put off potential buyers, along
with another list of the things that first attracted you to the
dwelling. Remember, the home's become a great place for you, but a
new buyer will see things that you don't.
2. Clean
Out the Clutter Before You Start to Sell
Before putting
your home on the market, get rid of clutter in every area -- closets,
attic storage, kitchen cabinets, drawers, bath vanities, and shelves
-- everywhere. Remember, this is no time to be sentimental: if you
don't use it, lose it. Potential buyers are seriously put off by
clutter, and most of us drag a lot more things through life than we
really need.
Also, don't forget
the furniture and fixtures when getting rid of clutter -- most of us
put too much in too little space, which makes a buying prospect,
think your home is too small.
Then, have a great
moving sale with all the stuff you've collected and use the proceeds
for paint or whatever other materials you need for repair projects.
If you just can't bear to part with some possessions, store them in
the attic or some other place that's out of sight to a potential buyer.
3. To
Sell, Sell, Sell -- Clean, Clean, Clean
After you've
cleared out the clutter, it's time to really clean. Have the carpets
professionally cleaned, strip and polish the floors, scour the
bathrooms, go over the laundry room, polish the furniture, scour out
the cabinets, wash the windows and window coverings, and spiff up the
ceiling fans and kitchen appliances. In short, clean everything.
Don't forget the
exterior; paint or power-wash everything that needs the work.
Remember, this is a ceiling-to-floor, roof-to-foundation clean-up project.
4. Get
More for Your Home: Repairs Pay Off
After you've
cleaned the place to within an inch of its life, the next project is
making all the repairs necessary to attract a buyer.
So, patch up the
roof, touch up all the paint, repair the screens, spruce up the porch
framing, and make your entry area really shine. Don't forget to water
the lawn and landscape beds, and take the time to trim, mow, edge and
get rid of sick or dying plants. Inside, fix the grout in the
bathrooms and on tile floors, adjust any doors that need it, fix any
scratches on the walls, cover any stains, and be sure to fix any
plumbing problems. Remember, do what your home needs before the first
buyer appears at your door.
Also, it's a good
idea to get all this done before getting the real estate broker to
make the first listing -- a good agent will advise you on what needs
to be done. Also, if you have friends willing to be brutally honest
about what your home needs to sell, invite them to assess the fix-up needs.
There is, however,
an alternative to the sweat equity you get from a total fix-up --but
it carries a price. An "as-is" sale keeps you from doing
all this work, but a buyer will assess about twice the price you
would have paid for the repairs. Then, the buyer will deduct that
amount from your asking price before making an offer.
5. Putting
Your Home on the Market: Show It to Sell It
After you have
cleaned, shined, mowed, and generally whipped your property into
shape, it's time to attract a buyer.
Regardless of who
markets your home, you or a broker, there are other, small things you
must do to attract buyers. For example, even if it's bright daylight,
open the blinds and turn on the lights. Also, open all the interior
doors to make the home appear roomier. Be sure to remove all your
kids and pets -- they're cute, but a prospect wants to see your home,
not your pride and joy. In addition, make sure you pet's litter pan
is clean so the home smells clean and fresh, not like air freshener.
Remember, you need to make sure your home is available to be seen by
a prospective buyer with as little notice as possible. That means
less than an hour, or even five minutes, if possible.
6. Get
a Sense of the Market
Before you put
your home on the market, take a weekend day to check out the
competition: homes with similar prices and in similar neighborhoods.
Remember, you don't have to go out and buy new furniture just to look
like that beautiful new model in the new development -- what you want
is the feel of that new model -- clean, uncluttered, and fresh.
Remember, after
location, the most important item to a buyer is a well maintained
home. Many flaws can be overlooked if the buyer knows he can move in
without a lot of trouble and expense.
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Home
Price Appreciation
How can I
improve the value of my property?
Outside of a
homeowner's control, the biggest factor is market conditions. Other
important issues are:
The greatest rise
in home prices occurs when the economy is strong and the number of
home sales is increasing. Specific home improvements can increase the
value above the cost of the improvements.
Remember, quality
pays. Well-planned and well-executed remodeling jobs are a good
investment while bad work seldom enhances value or livability.
The safety and
security of a neighborhood can affect property values, too. If you
live in a high-crime area, an organized community watch program not
only will lower the crime rate but give home values a boost, too.
How can I
increase the value of my property?
Specific home
improvements can increase your property value above the cost of the
improvements themselves, such as remodeling a kitchen, adding a
bathroom, finishing a basement or upgrading landscaping. Just be sure
that quality pays with remodeling. A bad remodeling job will do
little to boost your property value.
If you live in a
high-crime area, an organized community watch program not only will
lower the crime rate but can enhance property values, too. It also
helps to live in an area where other homeowners are upgrading their
homes, which can help pull up your property value, too.
The bottom line is
to measure the cost of any improvements you want to make against the
overall values in your neighborhood. If you over improve for the
neighborhood, you may not necessarily recover your costs or boost
your property value significantly.
Will
buying a bigger home increase my profit?
Consider these
questions before making a choice between adding on to an existing
home or moving up in the market to a bigger house:
Ultimately, the
decision should be based on individual needs, the extent of work
involved and what will add the most value.
How do I
find out how much my home is worth?
A comparative
market analysis and an appraisal are the standard methods for
determining a home's value.
Your real estate
agent will be able to provide a comparative market analysis, an
informal estimate of value based on comparable sales in the
neighborhood. Be sure you get listing prices of current homes on the
market as well as those that have sold. You also can research this
yourself by checking on recent sales in public records. Be sure that
you are researching properties that are similar in size, construction
and location. This information is not only available at your local
recorder's or assessor's office but also through private companies
and on the Internet.
An appraisal,
which generally costs $200 to $300 to perform, is a certified
appraiser's opinion of the value of a home at any given time.
Appraisers review numerous factors including recent comparable sales,
location, square footage and construction quality.
What are
the differences between market value and appraised value?
The appraised
value of a house is a certified appraiser's opinion of the worth of a
home at a given point in time. Lenders require appraisals as part of
the loan application process; fees range from $200 to $300.
Market value is
what price the house will bring at a given point in time. A
comparative market analysis is an informal estimate of market value,
based on sales of comparable properties, performed by a real estate
agent or broker. Either an appraisal or a comparative market analysis
is the most accurate way to determine what your home is worth.
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Condos and Home Associations
Are condos
a good investment?
Condominiums have
held their value as an investment despite economic downturns and
problems with some associations. In fact, condos have appreciated
more in the past few years than when they first came on the scene in
the late 1970s and early 1980s, experts say.
While there are
lots of reports about homeowners association disputes and
construction-defect problems, the industry has worked hard to turn
its image around. Elected volunteers who serve on association boards
are better trained at handling complex budget and legal issues, for
example, while many boards go to great lengths to avoid the kind of
protracted and expensive litigation that has hurt resale value in the past.
Meanwhile,
changing demographics are making condominiums more attractive
investments for single homebuyers, empty nesters and first-time
buyers in expensive markets.
What kinds
of rules and regulations do Associations regulate?
Typical covenants,
codes and restrictions (CC&Rs), which govern condo associations,
give the board authority to make and enforce reasonable rules for the
use of common property. But that would not apply to interior spaces
owned by smokers themselves.
A homeowners
association's board of directors can restrict smoking if it applies
to indoor common spaces such as hallways or recreation rooms. Outdoor
spaces are a different story, say legal experts. Any restriction
would probably hinge on local laws (i.e. if a city banned smoking
outdoors, a homeowners association probably could restrict smoking in
its outdoor spaces).
The 1990 Americans
with Disabilities Act does not require strictly residential
apartments and single-family homes to be made accessible. But all new
construction of public accommodations or commercial projects (such as
a government building or a shopping mall) must be accessible. New
multi-family construction also falls into this category.
In all states, the
Federal Fair Housing Act provides protection against discrimination
for people with physical or mental disabilities. Discrimination
includes the refusal to make reasonable modifications to buildings
that aren't accessible to the disabled.
What fees
can I expect to pay a home association?
Homeowners
association fees are considered personal living expenses and are not
tax-deductible. If, however, an association has a special assessment
to make one or more capital improvements, condo owners may be able to
add the expense to their cost basis. Cost basis is a term for the
money an owner spends for permanent improvements throughout their
time in the home and is used to reduce eventual capital gains taxes
when the property is sold. For example, if the association puts a new
roof on a building, the expense could be considered part of a condo
owner's cost basis only if they lived directly underneath it. Overall
improvements to common areas, such as the installation of a swimming
pool, need to be considered on a case-by-case basis but most can be
included in the cost basis of any owner who can show their home
directly benefits from the work.
Are
homeowner association fees tax deductible?
Homeowners
association fees are considered personal living expenses and are not
tax-deductible. If, however, an association has a special assessment
to make one or more capital improvements, condo owners may be able to
add the expense to their cost basis. Cost basis is a term for the
money an owner spends for permanent improvements throughout their
time in the home and is used to reduce eventual capital gains taxes
when the property is sold. For example, if the association puts a new
roof on a building, the expense could be considered part of a condo
owner's cost basis only if they lived directly underneath it. Overall
improvements to common areas, such as the installation of a swimming
pool, need to be considered on a case-by-case basis but most can be
included in the cost basis of any owner who can show their home
directly benefits from the work.
To find out more
about how the IRS views condo association fees, look to IRS
Publication 17, "Your Federal Income Tax," which includes a
section on condos. Order a free copy by calling (800) TAX-FORM.
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Improving Real Estate
Are there government programs for rehabilitation?
The U.S. Department of Housing and Urban Development's Section 203
(K) rehabilitation loan program is designed to facilitate major
structural rehabilitation of houses with one to four units that are
more than one year old. Condominiums are not eligible.
The 203(K) loan is usually done as a combination loan to purchase a
fixer-upper property "as is" and rehabilitate it, or to
refinance a temporary loan to buy the property and do the
rehabilitation. It can also be done as a rehabilitation-only loan.
Plans and specifications for the proposed work must be submitted for
architectural review and cost estimation. Mortgage proceeds are
advanced periodically during the rehabilitation period to finance the
construction costs.
For a list of participating lenders, call HUD at (202) 708-2720.
If you are a veteran, loans from the U.S. Department of Veterans
Affairs also can be used to buy a home, build a home, improve a home
or to refinance an existing loan. VA loans frequently offer lower
interest rates than ordinarily available with other kinds of loans.
To qualify for a loan, the first step is to apply for a Certificate
of Eligibility.
Another program is the Federal Housing Administration's Title 1 FHA
loan program.
How much can I expect to spend on maintenance?
Experts generally agree that you can plan on annually spending 1
percent of the purchase price of your house on repairing gutters,
caulking windows, sealing your driveway and the myriad other
maintenance chores that come with the privilege of homeownership.
Newer homes will cost less to maintain than older homes. It also
depends on how well the house has been maintained over the years.
What repairs should I make before putting a home on the market?
If you want to get top dollar for your property, you probably need to
make all minor repairs and selected major repairs before going on the
market. Nearly all purchase contracts include an inspection clause, a
buyer contingency that allows a buyer to back out if numerous defects
are found or negotiate their repair.
The trick is not to overspend on pre-sale repairs, especially if
there are few houses on the market but many buyers willing to buy at
almost any price. On the other hand, making such repairs may be the
only way to sell your house in a down market.
Can neighbor problems de-value the property?
While it may not reduce the actual value, a cluttered landscape next
door can detract from the positive aspects of your home. Review your
local laws, which should be on file at the public library, county law
library or City Hall.
A typical "junk vehicle" ordinance, for example, requires
any disabled car to either be enclosed or placed behind a fence. And
most cities prohibit parking any vehicle on a city street too long.
It also may be worthwhile to check into local zoning ordinances. An
operator of a home-based business usually is required to obtain a
variance or permanent zoning change in residential areas.
In addition, if a neighbor's repair work produces loud noises, he may
be breaking local noise-control ordinances, which are enforced by the
police department.
Before bringing in the authorities, you may want to make a copy of
the pertinent ordinance and give it to your neighbor to give them a
chance to correct the problem.
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Insurance
What kind of insurance do I need?
A standard homeowners policy protects against fire, lightning, wind,
storms, hail, explosions, riots, aircraft wrecks, vehicle crashes,
smoke, vandalism, theft, breaking glass, falling objects, weight of
snow or sleet, collapsing buildings, freezing of plumbing fixtures,
electrical damage and water damage from plumbing, heating or air
conditioning systems, according to the Insurance Information
Institute, a Washington, D.C.-based nonprofit group for the insurance industry.
Such policies are "all-risk" policies, which cover
everything except earthquakes, floods, war and nuclear accidents.
A basic policy can be expanded to include additional coverage, such
as for floods and earthquakes and even workers' compensation for
servants or contractors. Home-based business-coverage, an
increasingly popular rider, does not cover liability associated with
the business.
Insurance experts recommend that homeowners obtain insurance equal to
the full replacement value of the home. On a 2,000-square-foot home,
for example, if the replacement cost is $80 per square foot, the
house should be insured for at least $160,000.
For personal items, homeowners can increase their coverage beyond the
depreciated value of items such as televisions or furniture by
purchasing a "replacement-cost endorsement" on personal property.
Some experts recommend an inflation rider, which increases coverage
as the home increases in value.
What is guaranteed replacement cost insurance?
Guaranteed replacement insurance is a more comprehensive policy. It
tends to cost more, but it promises to cover the complete costs less
deductible of replacing a destroyed house. With these sorts of
policies, limits on the policies are not as common, because complete
coverage is more explicit.
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Taxes
Can property taxes be deducted?
Property taxes on all real estate, including those levied by state
and local governments and school districts, are fully deductible
against current income taxes.
Mortgage interest and property taxes are deductible on a second home
if you itemize. Check with your accountant or tax adviser for specifics.
How are property taxes configured?
Property taxes are what most homeowners in the United States pay for
the privilege of owning a piece of real estate, on average 1.5
percent of the property's current market value. These annual local
assessments by county or local authorities help pay for public
services and are calculated using a variety of formulas.
How does home mortgage tax deductions work?
The mortgage interest deduction entitles you to completely deduct the
interest on your home loan for the year in which you paid it.
Mortgage interest is not a dollar-for-dollar tax cut; it reduces
taxable income. You must itemize deductions in order to do this,
which means your total deductions must exceed the IRS's standard deduction.
Another point to remember is that the amount of interest on your loan
goes down each year you pay on your mortgage (all standard home-loan
formulas pay off interest first before significantly paying into
principal). That's why paying extra on your principal every year can
help you pay off your loan early.
What is an impound account?
An impound account is a trust account established by the lender to
hold money to pay for real estate taxes, and mortgage and homeowners
insurance premiums as they are received each month.
Are points deductible?
If you are a buyer, and you or the seller pays points, they are
deductible for the year in which they are paid only. You also can
deduct any points you pay when you refinance your home, but you must
do so ratably over the life of the loan. Consult your tax or
financial advisor.
Are there tax breaks for first-time buyers?
Many city and county governments offer Mortgage Credit Certificate
programs, which allow first-time homebuyers to take advantage of a
special federal income tax write-off, which makes qualifying for a
mortgage loan easier.
Requirements vary from program to program. People wanting to apply
should contact their local housing or community development office.
Some things to keep in mind:
You must be a first-time homebuyer, which means
you must not have had any kind of ownership interest in a principal
residence during the past three years. This restriction may be
waived, however, if you are buying property within certain target areas.
Allocations must be available. A local MCC program may have to
decline new applications when it runs out of funds.
Are home improvements deductible?
What you spend on permanent home improvements, such as new windows,
can be added into your home's cost basis, or amount of money invested
in a home, which reduces capital gains when it comes time to sell.
Capital gains are determined by the difference in price from the time
a home is purchased and the time it is sold, minus the cost of any
permanent improvements.
However, the 1997 tax changes virtually eliminate the capital gains
tax for most homeowners (the exemption is $250,000 for single
homeowners and $500,000 for married homeowners).
Still, it is worthwhile to save all receipts for permanent home
improvements just in case. They also can be useful documentation when
it comes to marketing your home when you sell.
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Refinancing
When is the best time to refinance?
It depends on how long you plan to hold on to your house and if you
have to pay anything to refinance. In addition, it also depends on
how far along you are in paying off your current mortgage.
If you are going to be selling your house shortly, you probably will
not recoup any costs you incur to refinance your mortgage. If you are
more than halfway through paying your current mortgage, you probably
will gain little by refinancing. However, if you are going to own
your home for at least five years, that's probably long enough to
recoup any refinancing costs you incur and to realize real savings on
lowering your monthly payment. If it is going to cost you nothing to
refinance, you can gain even more.
Many lenders will allow you to roll the costs of the refinancing into
the new note and still reduce the amount of the monthly payment.
Also, there are no-cost refinancing deals available. In any case, it
pays to consult your lender or financial advisor, or run the numbers
yourself, before you refinance.
What are the advantages/disadvantages of no-cost loans?
In many states, real estate regulatory agencies are cracking down on
such advertising. The very term, "no-cost" loan, is
misleading because borrowers are actually paying a higher interest
rate in exchange for not having to pay fees or closing costs up front
when the loan is secured.
A "no-points" loan is one for which the lender does not
charge points (one point is equal to 1 percent of the loan amount).
But there are other fees involved in no-point loans, as with most loans.
How does bankruptcy affect my refinancing?
Refinancing may be prudent but could be difficult after a bankruptcy.
If you're considering bankruptcy, you may want to go to your current
lender first and explain the situation. If you have been current on
your payments, the lender may be accommodating and refinance your
loan, easing your financial situation.
What are the rules on Capital Gains?
When children inherit a home, the Internal Revenue Service determines
their basis in the property on the date of the owner's death. The
cost basis is not the amount the owner originally paid for the house,
but the property's fair-market value on the date of the parent's death.
Cost basis is a tax term for the dollar amount assigned to a property
at the time it is acquired, for the purpose of determining gain or
loss when it is sold. For example, one of the three siblings sold his
or her share of a property to be divided equally, he or she must pay
capital gains tax for whatever profit made over one-third of the new basis.
Other tax consequences include estate taxes. However, the estate must
total $675,000 or more for tax year 2000 before tax issues become a
concern. The IRS allows residents to pass on property, cash and other
assets worth up to a total of $675,000 for tax year 2000 before
charging the heirs any taxes. This figure will rise each year for the
next several years.
Regarding the transfer of ownership, quit-claim deeds often are used
between family members in situations such as this when an heir is
buying out the other. All parties must be agreeable to dropping a
name from the title. For more information, consult the IRS's
Publication 448, "Federal Estate and Gift Taxes." Order by
calling 1-800-TAX-FORM.
Which home buying costs are deductible?
Any points you or the seller pay to purchase your home loan are
deductible for that year. Property taxes and interest are deductible
every year.
But while other home-buying costs (closing costs in particular) are
not immediately tax-deductible, they can be figured into the adjusted
cost basis of your home when you go to sell (any significant home
improvements also can be calculated into your basis). These fees
would include title insurance, loan-application fee, credit report,
appraisal fee, service fee, settlement or closing fees, bank
attorney's fee, attorney's fee, document preparation fee and
recording fees. Points paid when you refinance an existing mortgage
must be deducted ratably over the life of the new loan.
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The modern mortgage market offers a variety of
mortgage loans catering to the needs of homebuyers. The titles and
details of these plans can become confusing, especially as new types
are introduced continuously. You can make sense of these loan types,
however, if you understand the basic principles that govern all
mortgage loans. Again, you can look to your real estate
professional for assistance.
Basic Principles of all Mortgage Loans
All mortgage loans have one of the
following features:
As you learn more about the types of financing
available, you will notice that some loans appear to have more
favorable terms. That may indicate that those loans are, indeed,
bargains (and it does pay to shop around), but usually it means that
those loans could have some feature that is less appealing to
borrowers. For example, shorter-term loans often have slightly lower
interest rates compared to longer-term loans. However, the monthly
payment for the same amount of principal may be higher because of the
shorter term. Variable rate loans usually have much lower interest
rates to compensate for the risk the borrower accepts that interest
rates will rise in the future.
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Foreclosures
Are Foreclosures a good investment?
A foreclosure property is a home that has been repossessed by the
lender because the owners failed to pay the mortgage. Thousands of
homes end up in foreclosure every year. Economic conditions affect
the number of foreclosures, too. Many people lose their homes due to
job loss, credit problems or unexpected expenses.
It is wise to be cautious when considering a foreclosure. Many
experts, in fact, advise inexperienced buyers to hire an expert to
take them through the process. It is important to have the house
thoroughly inspected and to be sure that any liens, undisclosed
mortgages or court judgments are cleared or at least disclosed.
Are there different types of foreclosures?
Judicial foreclosure action is a proceeding in which a mortgage, a
trustee or another lien holder on property requests a
court-supervised sale of the property to cover the unpaid balance of
a delinquent debt.
Non-judicial foreclosure is the process of selling real property
under a power of sale in a mortgage or deed of trust that is in
default. In such a foreclosure, however, the lender is unable to
obtain a deficiency judgment, which makes some title insurance
companies reluctant to issue a policy.
How do I find a foreclosed property?
In most states, a foreclosure notice must be published in the legal
notices section of a local newspaper where the property is located or
in the nearest city. Also, foreclosure notices are usually posted on
the property itself and somewhere in the city where the sale is to
take place.
When a homeowner is late on three payments, the bank will record a
notice of default against the property. When the owner fails to pay
up, a trustee sale is held, and the property is sold to the highest
bidder. The financial institution that has initiated foreclosure
proceedings usually will set the bid price at the loan amount.
Despite these seemingly straightforward rules, buying foreclosures is
not as easy as it may sound. Sophisticated investors use the
technique so novices may find themselves among stiff competition.
How does HUD affect my buying a foreclosure?
If you are strapped for cash and looking for a bargain, you may be
able to buy a foreclosure property acquired by the U.S. Department of
Housing and Urban Development for as little as $100 down.
With HUD foreclosures, down payments vary depending on whether the
property is eligible for FHA insurance. If not, payments range from 5
to 20 percent. But when the property is FHA-insured, the down payment
can go much lower.
Each offer must be accompanied by an "earnest money" deposit equal to 5 percent of the bid price, not to exceed $2,000 but
not less than $500.
The U.S. Department of Veterans Affairs also offers foreclosure
properties which can be purchased directly from the VA often well
below market value and with a down payment amount as low as 2 percent
for owner-occupants. Investors may be required to pay up to 10
percent of the purchase price as a down payment. This is because the
VA guarantees home loans and often ends up owning the property if the
veteran defaults.
If you are interested in purchasing a VA foreclosure, call
1-800-827-1000 to request a current listing. About 100 new properties
are listed every two weeks.
You should be aware that foreclosure properties are sold "as
is," meaning limited repairs have been made but no structural or
mechanical warranties are implied.
You can only purchase a U.S. Department of Housing and Urban
Development property through a licensed real estate broker. HUD will
pay the broker's commission up to 6 percent of the sales price.
Where do you find government foreclosed homes?
The U.S. Department of Housing and Urban Development acquires
properties from lenders who foreclose on mortgages insured by HUD.
These properties are available for sale to both homeowner-occupants
and investors.
You can only purchase HUD-owned properties through a licensed real
estate broker. HUD will pay the broker's commission up to 6 percent
of the sales price.
Down payments vary depending on whether the property is eligible for
FHA insurance. If not, payments range from the conventional market's
5 to 20 percent.
Buying a foreclosure property can be risky, especially for the
novice. Usually, you buy a foreclosure property "as is," which means there is no warranty implied for the condition of the
property (in other words, you can't go back to the seller for
repairs). The condition of foreclosure properties is usually not
known because an inspection of the interior of the house is not
possible before the sale.
In addition, there may be problems with the title, though that is
something you can check out before the purchase.
Buying directly at a legal foreclosure sale is risky and dangerous.
It is strictly caveat emptor ("Let the buyer beware").
The process has many disadvantages. There is no financing; you need
cash and lots of it. The title needs to be checked before the
purchase or the buyer could buy a seriously deficient title. The
property's condition is not well known and an interior inspection of
the property may not be possible before the sale.
In addition, only estate (probate) and foreclosure sales are exempt
from some states' disclosure laws. In both cases, the law protects
the seller (usually an heir or financial institution) who has
recently acquired the property through adverse circumstances and may
have little or no direct information about it.
Can I get financing on a foreclosure?
One reason there are few bidders at foreclosure sales is that it is
next to impossible to get financing for such a property. You
generally need to show up with cash and lots of it, or a line of
credit with your bank upon which you can draw cashier's checks.
What are trustee sales?
Trustee sales are advertised in advance and require an all-cash bid.
A sheriff, a constable or lawyer acting as trustee usually conducts
the sale. This kind of sale, which usually attracts savvy investors,
is not for the novice.
In a trustee sale, the lender who holds the first loan on the
property starts the bidding at the amount of the loan being
foreclosed. Successful bidders receive a trustee's deed.
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Fixer-Uppers
Is it smart to
even consider a fixer-upper?
It depends. Distressed properties or fixer-uppers can be found
anywhere, even in wealthier neighborhoods. Such properties are poorly
maintained and have a lower market value than other houses in the neighborhood.
Many experts recommend that before you make such an investment, first
find the least desirable house in the best neighborhood. Then do the
math to see if what it would cost to bring up the value of that
property to its full potential market value is within your budget. If
you are a novice buyer, it may be wiser to look for properties that
only need cosmetic fixes rather than run-down houses that need major
structural repairs.
Is there a tax break for a fixer-upper house if
it is considered historical?
Qualified rehabilitated buildings and certified historic structures
currently enjoy a 20 percent investment tax credit for qualified
rehabilitation expenses. A historic structure is one listed in the
National Register of Historic Places or so designated by an
appropriate state or local historic district also certified by the government.
The tax code does not allow deductions for the demolition or
significant alteration of a historic structure.
The U.S. Department of Housing and Urban Development's Section 203
(K) rehabilitation loan program is designed to facilitate major
structural rehabilitation of houses with one to four units that are
more than one year old. Condominiums are not eligible.
The 203(K) loan is usually done as a combination loan to purchase a
fixer-upper property "as is" and rehabilitate it, or to
refinance a temporary loan to buy the property and do the
rehabilitation. It can also be done as a rehabilitation-only loan.
Plans and specifications for the proposed work must be submitted for
architectural review and cost estimation. Mortgage proceeds are
advanced periodically during the rehabilitation period to finance the
construction costs.
For a list of participating lenders, call HUD at (202) 708-2720.
If you are a veteran, loans from the U.S. Department of Veterans
Affairs also can be used to buy a home, build a home, improve a home,
or refinance an existing loan. VA loans frequently offer lower
interest rates than ordinarily available with other kinds of loans.
To qualify for a loan, the first step is to apply for a Certificate
of Eligibility.
Are there special loans for Fixer-uppers?
If you need a home loan to buy a "fixer-upper" and remodel
it, look at the U.S. Department of Housing and Urban Development's
Section 203(K) loan program. The program is designed to facilitate
major structural rehabilitation of houses with one to four units that
are more than one year old. Condominiums are not eligible.
A 203(K) loan is usually done as a combination loan to purchase a "fixer-upper" property "as is" and rehabilitate
it, or to refinance a temporary loan to buy the property and do the
rehabilitation. It can also be done as a rehabilitation-only loan.
Investors must put 15 percent down while owner-occupants are required
to come up with only 3 to 5 percent. HUD requires that a minimum of
$5,000 be spent on improvements.
Two appraisals are required. Plans and specifications for the
proposed work must be submitted for architectural review and cost
estimation. Mortgage proceeds are advanced periodically during the
rehabilitation period to finance the construction costs.
What are building codes?
Building codes are established by local authorities to set minimum
public-safety standards for building design, construction, quality,
use and occupancy, location and maintenance. There are specialized
codes for plumbing, electrical and fire, which usually involve
separate inspections and inspectors.
All buildings must be issued a building permit and a Certificate of
Occupancy before it can be used. During construction, housing
inspectors must make checks at key points. Codes are usually enforced
by denying permits, occupancy certificates and by imposing fines.
Building codes also cover most remodeling projects. If you are buying
a house that has been significantly remodeled, ask for proof of the
permits involved before you purchase to avoid future liability for fines.
How do I find a good contractor?
While hiring contractors recommended by friends is usually a safe
route, never hire a construction professional without first checking
him or her out. If your state has a licensing board for contractors,
call to find out if there are any outstanding complaints against that
license holder. Also, call your local Better Business Bureau to see
if there are any complaints on file.
If you are satisfied with the answers you find there, interview the
contractor candidates. Ask what kind of worker's compensation
insurance they carry and get policy and insurance company phone
numbers so you can verify the information. If they are not covered,
you could be liable for any work-related injury incurred during the
project. Also be sure that the contractor has an umbrella general
liability policy.
If they pass the insurance hurdle, next check some of their
references. A good contractor will be happy to provide as many as you want.
Finally, don't let yourself be rushed into making a decision no
matter how competitive the market may seem. Also, never pay a deposit
to a contractor at the first meeting. You may end up losing your money.
Is remodeling worth the price and time?
Remodeling magazine produces an annual "Cost vs. Value
Report" that answers just that question. The most important
point to remember is that remodeling a home not only improves its
livability for you but its "curb appeal" with a potential
buyer down the road.
Most recently, the highest remodeling paybacks have come from
updating kitchens and baths, home-office additions and extra
amenities in older homes. While home offices are a relatively new
remodeling trend, for example, you could expect to recoup 58 percent
of the cost of adding a home office, according to the survey.
How do I look for fixer-uppers?
You can find distressed properties or fixer-uppers in most
communities, even wealthier neighborhoods. A distressed property is
one that has been poorly maintained and has a lower market value than
other houses in the immediate area.
Ascertaining whether the property you're interested in is a wise
investment takes some work. You need to figure what the average house
in a given area sells for, as well as what the most desirable houses
in that area are like and what they cost.
Some experts suggest that buyers who take this route try to find a "cosmetic fixer" that can be completely refurbished with
paint, wallpaper, new floor and window coverings, landscaping and new
appliances. You should avoid run-down houses that need major
structural repairs. A house price that looks too good to be true
probably is. A smart buyer will find out why before buying it.
The basic strategy for a fixer is to find the least desirable house
in the most desirable neighborhood, and then decide if the expenses
needed to bring the value of that property up to its full potential
market value are within one's rehab budget.
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Condos, Apartments & Single Family
What are the differences
between condos and single-family homes?
Using appreciation as a measure, condominiums in some areas have been
as profitable an investment as single-family homes in the past five
years. And in some markets, condos appreciated even more, according
to some experts.
While single-family homes have been the preferred investment by
homebuyers, changing demographics are helping make condos more
popular, especially among single homebuyers, empty nesters and
first-time buyers in high-priced markets.
Also, the condominium community has worked hard in the last few years
to overcome image problems brought on by homeowners association and
developer disputes as well as all too frequent construction-defect litigation.
Should I be looking into Condos?
While condos never had the kind of appreciation experienced by
single-family homes in the go-go 1980s, most ultimately have not lost
value, say some experts. And with high prices in many urban markets
and more single homebuyers in the market than ever before, the market
for condos is strong.
As with any home purchase, you should do your homework about the
neighborhood or development before you buy. In the case of
condominiums, it is important to read the past six months of
homeowners association minutes to see how effective the board is and
to learn about any possibly detracting issues (such as protracted
litigation with the developer).
The condominium community has worked hard in the last few years to
overcome image problems brought on by disputes and lawsuits.
Associations are becoming more sophisticated about property
management and taking steps to prevent legal problems and disputes.
Condominiums have held their value as an investment despite economic
downturns and problems with some associations. In fact, condos have
appreciated more in the past few years than when they first came on
the scene in the late 1970s and early 1980s, experts say.
While there are lots of reports about homeowner's association
disputes and construction-defect problems, the industry has worked
hard to turn its image around. Elected volunteers who serve on
association boards are better trained at handling complex budget and
legal issues, for example, while many boards go to great lengths to
avoid the kind of protracted and expensive litigation that has hurt
resale value in the past.
Meanwhile, changing demographics are making condominiums more
attractive investments for single homebuyers, empty nesters and
first-time buyers in expensive markets.
How do homeowners Associations work?
Learn everything you can about the homeowners association before you
buy into a development governed by one. The association's financial,
political and legal conditions are very important to your investment
and quality of life.
When run properly, homeowners associations maintain the common
grounds and keep civility in the complex. If you follow the rules,
the association should not intrude on your privacy or cost you too
much in association dues.
Poorly managed associations can drag down property values and make
living there difficult for residents. Start by studying the
association's covenants, codes and restrictions, or CC&Rs, and
find out if you can live by them. For example, if the rules prohibit
loud music after a certain hour and you like to play your CDs late at
night, this may not be the place for you. Don't move in thinking you
can get away with violating the rules or change them later because
you may find yourself in turmoil with determined neighbors firmly in
control of the association board.
Find out all you can about the association's finances. Beyond
reviewing the budget, talk to the association treasurer and find out
if dues are expected to increase and if any special assessments are
planned. Ask if special inspections have revealed problems with roofs
or plumbing that may cause a dues hike or special assessment later on.
Call and meet with the association president. If you are the type of
person who despises intrusions into your private life and the
president seems more interested in gossip about the residents than
maintaining the property, this may not be the right condo complex for you.
Speak with residents to get their views on the association's
finances, its property manager, how it operates and any politics.
Associations are volunteer organizations with elected boards, like a
mini-government, so politics can enter the picture and spoil a good thing.
Lastly, take some time to understand how homeowners associations are
organized and how they conduct business. Like all real estate
investments, the more you know the better off you are.
Is it difficult to project rents on rentals?
If you are buying a rental income property and applying for a loan to
do so, the lender will require an area rent survey by a certified
appraiser. The amount a landlord can expect to receive in monthly
rent largely depends on what the property has rented for in the past,
the condition of the building, its location and the current housing market.
Lenders also look at other cash-flow considerations. They want to
know if you have enough reserves on hand to cover predictable and
unforeseen expenses, such as property insurance, taxes, regular
maintenance and repairs.
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Vacation Homes
Are vacation homes a good investment?
You can buy a vacation home today for investment purposes as well as
enjoyment. And yes, there are tax benefits.
Some people buy a vacation home to use as a permanent retirement home
later, which allows them to get ahead on their payments. Another
benefit is that the interest and property taxes on a vacation home
are tax-deductible.
Some real estate experts predict that vacation homes will appreciate
in value due to rising demand from the aging Baby Boom generation.
You also can depreciate the property if you live in the house less
than 14 days a year.
You also need to consider whether you can afford to carry two
mortgages, pay for the extra utilities and maintenance costs, and how
this investment fits into your total personal finance picture.
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