photo

  David Rathgeber's

   Buying
        a Home

in the Washington, D.C. Metro Area

Edited by Chris Sicks
former editor of the
Washington Times Friday Home Guide

Internet Edition

International Standard Book Number 0-9710312-1-5

Published by The Realty Research Group, LLC

Copyright © David Rathgeber - All Rights Reserved

You are hereby authorized to read this copy on your computer screen. You are NOT authorized to make any additional copy of any nature: paper, electronic storage media, or otherwise without the express written permission of the author. Violators will be vigorously prosecuted.

To request written permission to print one copy of this book for personal use, email davidr@davidr.net and permission will be granted liberally upon suitable identification.


CONTENTS

Chapter 1 - Initial Considerations
Chapter 2 - Planning the Attack
Chapter 3 - Selecting an Agent
Chapter 4 - The Financing Jungle
Chapter 5 - Your Home Specifications
Chapter 6 - On the Road
Chapter 7 - Making the Choice
Chapter 8 - The Negotiation Process
Chapter 9 - Negotiating the Contract
Chapter 10 - On to Closing
Chapter 11 - Putting it all Together

APPENDICES

A - To Rent or to Buy?
B - Ten Tips for First-time Buyers
C - Tax Assessments
D - Selling Price / Asking Price
E - Home Selection Check List
F - The Market Index
G - Homes on the Market
H - Homes Sold
J - Hot Market Tricks
K - Don't Overpay on a Home
L - Put the News into Perspective

GLOSSARY

[Go to Glosssary]

David at the National Association of Realtors Convention

ABOUT THE AUTHOR
****************************

David Rathgeber ranks consistently among the top award-winning agents and is actively engaged in sales and marketing of residential real estate in Virginia. His comments and articles have appeared frequently in major newspapers, and he has written for the national REALTOR Magazine. His books incorporate the wisdom of over twenty-five years of real estate experience along with his diverse technical and international business background. He holds a degree in Mechanical Engineering and a Master of Business Administration.

Note: Contact the author with your questions and comments, or for help buying or selling a home. See his web site for the current local Market Report, other on-line books, and much more.

ABOUT THE EDITOR
****************************

Chris Sicks is a real estate journalist in Washington, D.C., and former host of The Home Guide TV Show. As editor and reporter for The Washington Times, he has written hundreds of articles on buying and selling real estate.

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CHAPTER 1
INITIAL CONSIDERATIONS
*****************************

Welcome to the “American Dream.” It is a wonder that it took you this long to realize you needed shelter. But on the other hand, are you sure you really want to do this? A search for a home can be agonizing, moving can be worse, and after all that, you are left with 360 whopping monthly payments; assuming you are one of the unlucky multitude who are unable to pay cash. Perhaps you should stop and consider this idea one more time, before you buy this book. There is still time to return it to the shelf.

If you decide to go ahead with buying a home, the information in this book will save you time, money, headaches, and heartaches. Buying a home is an important undertaking, and in these times a complex one. You need to know what to expect before you begin. This book is written with the inside information to help you accomplish the task with insight and efficiency. It is not full of abstruse theory, or misleading opinion, but contains verifiable facts and practical ideas that work in today's market.

Although the book will be invaluable for anyone buying a home, it is intended to complement the experience and technical knowledge of licensed professionals. Its main purpose is to provide vital information and ideas that are not available in any other publication. Additional useful information of a general nature is available from the following sources:

As with any complex subject, you will hear a variety of opinions. Some might conflict with others. So, just as in other facets of your life, always ask:

There probably are some good reasons not to buy a home. Most of us give them little thought and this book will do likewise. While the seasonal changes in North America are not extreme, most folks rate shelter as a necessity rather than a luxury. So, what are the alternatives? You can only sleep on your friend's couch for so long, and your car isn't really designed to live in, is it? The decision really is between renting, and buying a place of your own. While we have all heard that rent paid is money lost, we will examine the numbers a bit more closely later.

As you probably know, home ownership provides much more control over one's housing environment than renting. The control comes, of course, at the cost of some flexibility: You can't just load the car and move across the country when the lease expires. But selling a home, when executed correctly, usually can be accomplished in a reasonable time and without undue strain.

Let us examine how best to approach a home purchase, which is for most people, their biggest financial decision. We all hope that our home purchase will be as good an investment as homes have been historically in the long term. We all imagine the home we select will be a palace made for entertaining with a pleasing “flow.” While a home can be a wise financial investment and a place to entertain guests, the main purpose of a home is to provide you with shelter. It must also be a place with sufficient space and a home that you will enjoy returning to each day.

While we're at it we will mention the importance of buying a home that fits your pocketbook. Although ample consideration will be given later to how to pay for a home, it will be most valuable for you to have a brief, no obligation telephone conversation with a mortgage loan officer. In little more than five minutes you can get an initial idea of your upper price limit. While this figure might need some refinement after you have read Chapter 4, which deals with financing, it will save you a lot of time to have a rough idea early in the game.

A capable real estate agent should also be able to provide a quick estimate, as well as some names of local loan officers. However you choose to calculate it, you need to know what you can afford. It is your decision whether to buy a home within those means, or one that pushes the limit. The choice is yours to consider very carefully. But remember this, the cost of making a serious mistake and having to sell and buy again is over 10% of your home's value. Of course, you always have the option of continuing to live in a home that you absolutely detest, but purchased anyway because it was inexpensive or seemed convenient. Don't forget: Home buying is serious business.

Many of us think of a home purchase as a wise investment, and it is. But in contrast to some times in the past, when home ownership was considered a means to get rich quick, current thinking focuses much more on the shelter value of a home. Nevertheless, it is not unrealistic to hope that your home will increase in value. It might also drop in value, so don't count on appreciation when you do your financial planning. Remember, compared with any other investment, a home provides a basic necessity of life: Shelter. Also, a home is a non-liquid asset. While millions of investors can decide to call their stock broker on some Monday, say October 19, and have sell orders executed promptly, a widespread real estate sell-off would take time to accomplish. These factors, shelter and non-liquidity, assure less emotion, less of the “herd instinct,” and hence less volatility in real estate than almost any other form of investment.

In addition to the stability of the real estate market, there are unique income tax benefits that provide an incentive to own a home. The deductibility of mortgage loan interest and real estate taxes, and the exclusion of gains from income taxation for most sellers, are generous gifts from Uncle Sam. These advantages are very real, but fully investigate the ifs, ands, and buts by either reviewing the appropriate Tax Publications or consulting a tax accountant.

For most, a home purchase will result in significant Federal and State income tax benefits: Some are one-time benefits in the year of purchase; some are continuing benefits to help in subsequent years. In this ever-changing world of taxation it is wise consult a tax accountant as well as the pertinent IRS publications, including the following:

Consider the following types of home buyers and the important and unique considerations that pertain to each:

If you are an incoming transferee, moving to a new area as a result of a new job, your home search probably will be intensive. While you might consider renting a home for a while to “try out” an area, most find this is much too disruptive and uncertain. Most also find that selection of a rental home is just as complex as finding a home to purchase. And for those who do rent, it is most likely that they ultimately will buy in the same area. In addition to the aggravation of a second move, they will very likely have to pay to move again, as most employers will pay for only one move. On the other hand, if you want to convince your new boss that you are unsure about the job, then renting for a while will serve to underscore your uncertainty! In any event, transferees should become familiar with IRS Publication 521 entitled Moving Expenses.

Fortunately, many transferees find that a home purchase can be accomplished during a one-week house hunting trip. It can happen like this:

The preceding scenario is based on some important assumptions:

Accomplishing the goal of selecting a home in a week is possible due to the way in which a major real estate market works in your favor. First, computerized MLS (Multiple Listing Service) search capabilities facilitate selection of those properties that are most likely to meet your needs, out of the thousands available. Second, a lockbox, or keysafe system prevents your agent having to collect and return keys to the listing broker's office, or a wait for the listing agent to appear with a key, or a wait for the homeowner to come home. This system enables you to see properties at your convenience. As a result, experienced real estate agents can cover an entire metropolitan area market with ease. This means that you are relieved of finding several agents, each covering “their area.” Selecting only one agent will help you make a better home choice in much less time. It relieves you of major problems involved in multiple agent selection, and subsequent agent coordination. Almost all agents will agree on this point.

The term “your agent” as used in the preceding paragraph will be used in a general sense to refer to the agent helping you find a home, in other words, a selling agent. Chapter 2 will make the very important distinction between a selling agent who is representing you, and one who is representing the seller.

One word of caution for the incoming transferee: If your employer insists on selecting your real estate agent, find out why. Many employers provide benefits and advice to relocating employees. This can be done in-house, but more often it is done through third-party relocation firms who also might urge you to select your agent from their list. By directing you to a list of “specially selected” real estate agents, you are a captive client without the freedom to choose your own agent. The agents on such a list are asked to forego up to 40% of their commission in order to be selected for the job. The agent you obtain through such a process is not selected with your best interests as the sole criteria. Do you think the most experienced and successful agents are doing this?

Further, the above practice is so widespread, that it is the subject of real estate legislation and court battles in many States. But many employees never know what happened, why it happened, or who received what compensation. Ask your employer about this. Who gets the portion of the commission that the agent gives up? The third-party relocation firm? Your employer? The choice of a home is likely the biggest financial decision you will ever make. Should someone else be allowed to choose your advocate, advisor, and negotiator?

If you are a move-up buyer, selling your current home and looking for something bigger, better, and more expensive, you will benefit most in a buyers' market. In moving to a more expensive home the price concessions you will negotiate should more than offset the concessions you will have to give on the sale of your current home. Another factor to your advantage in a buyers' market is a wider selection of available homes.

One alternative some potential move-up buyers choose instead is remodeling. If a structural addition to accommodate your needs or desires seems better for you, be sure to heed the following:

Also consider that the cost of a structural addition to your home can easily be $200 per square foot. Contrast that cost figure with the value of an additional square foot to your future buyer, or for that matter to the real estate appraiser whose job is to measure the market: Approximately $50 per square foot. So if you do expand your current home, be sure to stay there and enjoy it for a long time.

If you are a move-down buyer, looking for a smaller, less expensive home, a hot sellers' market would be to your financial advantage. The reasons for this are, of course, just the opposite of those cited above for the move-up buyer. But in a hot market, the number of available homes is comparatively small. When the selection is limited, it is more difficult to find a suitable home.

The first-time buyer, or anyone renting for that matter, is in an excellent position, especially if their lease is month-to-month. Under no great pressure to move, the first-time buyer can make a home selection and negotiate a contract under the most favorable terms, especially in a buyers' market. In addition, owning can be less expensive than renting in many cases, so you win all around.

Be sure to calculate home ownership costs and benefits that can be compared with monthly rent. A critical factor is the mortgage interest rate. Use your own set of assumptions to determine the anticipated economic impact of becoming a homeowner. It is most important to realize the tax benefits of home ownership and that they can be obtained in each paycheck merely by filing a new IRS Form W-4 with your employer. There is no need to wait for a large tax refund in the spring. Enjoy the refund every pay period, when it will do the most good for your budget.

Also view the big picture: The expected rate of appreciation in home values can be a controlling long-term factor. Remember, however, that you are not guaranteed that home values will appreciate.

First-time buyers sometimes approach a home purchase with a good deal of unadulterated fear. The best way to deal with this fear of the unknown world of real estate is to talk with friends who recently purchased a home for the first time or to enroll in an evening school course on home buying. As knowledge replaces the dreaded unknown, fear will subside and an intelligent decision will emerge that is right for you.

NOTE: The text of David Rathgeber's article “TEN TIPS for FIRST-TIME BUYERS” which appeared on the front page of the January 26, 1996 issue of the “Home Report” (published Fridays by The JOURNAL) appears in APPENDIX B.

Most move-up buyers and move-down buyers must make the same decision: To sell their current home first and then buy, or to find their next home and enter a contract contingent on the sale of their current home. If financial considerations are most important, sell your current home first, and then purchase your next home. Being under no time pressure to sell your current home will put you in the strongest negotiating position. Having sold your current home you will be in a better position, as a non-contingent buyer, to negotiate a lower price on your next home. Further, many sellers will not even consider contingent offers. Remember, like the incoming transferee described earlier, you should be able to find the best available home that meets your needs and negotiate a favorable contract within one week if necessary. More often you will have several weeks.

Enter a contract to purchase a home contingent upon the sale of your current home only under the following circumstances:

But if it is that difficult to find an acceptable home, you seriously should consider not moving. Contingent contracts are rarely a good idea under any market conditions.

In any event, move-up and move-down buyers will have to deal with either a quick sale of their current home (in the case of a contingent contract) or a quick purchase of their next home after the sale of their current home. The only way to avoid a quick sale or a quick purchase is to sell your current home and move to rented quarters. The extra cost and aggravation of this double move is unacceptable to most people, but it provides maximum flexibility and involves the least time pressure. It therefore puts you in the strongest negotiating position.

One popular Internet information source is MRIShomes.com. If you would like to investigate homes for sale on your own, this is the best site for two compelling reasons: First, the greatest number of homes for sale appears on this one site. Second, the information is accurate and not too stale. Why is this? The information in MRIShomes.com is, downloaded directly from the Realtors' local MLS system. No need to visit 10 or 15 sites to obtain only partial views of the market that often include homes already sold months ago but are still shown as available. However, you will want to use an agent when you become an active home hunter. The database searches that agents can perform are much more specific. They also yield information that is up-to-date and much more detailed. In addition, the efficiency of viewing homes with an agent who has a lockbox key will become very clear, if it is not intuitively obvious.

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CHAPTER 2
PLANNING THE ATTACK
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Chances are your local real estate market is very organized and orderly. It is defined by, but not necessarily limited to, those homes listed for sale in the regional MLS computer database. The vast majority of home sales are through real estate brokers who use a computerized MLS search facility in conjunction with a lockbox system for locating and showing properties. Major market areas have a high proportion of sophisticated and intelligent home buyers and sellers and a well-developed set of customs and procedures.

For the reasons cited, selling prices (or more correctly, contract prices) for most homes actually represent their fair market values. This is important because the continuity and orderliness of the market means future prices can be predicted from recent sales. Exceptions to the rule are rare and usually result from one of the following:

It bears repeating that these exceptions are rare and that actual selling prices nearly always represent fair market values.

Therefore, you should not be surprised that “the real estate market,” in its infinite wisdom, has already determined the price you will have to pay for any particular home, give or take a few thousand dollars. (More later about market values and how you can achieve a minimum price.) The idea of an orderly real estate market is a most important concept that should be kept in mind.

Home buyers who spend time searching for that one seller who will take 20% less than fair market value, invariably find it to be a frustrating and unproductive exercise. Of course, you will hear stories of those who got unbelievably low prices on their home purchases. While a very few of these stories might be true, many times important facts have been omitted as the story was passed from person to person. There are just not that many desperate and deranged sellers out there. If you go on a search for one, you are likely to become desperate, if not deranged yourself.

Plan to see many homes, possibly 40 or more, and weigh your decision carefully before making a purchase. You are spending a large sum of money and your home should not only provide shelter but should also be a good investment and a comfortable place to live. But remember that most home buyers move within ten years; so don't try to find a home that will be perfect forever.

Many buyers begin their search for a home after seeing a “For Sale” sign in front of an attractive property. While this is one way to get started, it is impossible to find the best home for your needs by simply driving up and down roads looking for signs. This method is not even effective in a limited area, because some homes that are for sale will not have signs. Furthermore, there are literally thousands of homes currently for sale. Even if you spent enough time and gasoline to find all the signs, a project that would take months, you have no way of knowing whether the homes meet your needs. In fact, you will have to make a telephone call just to learn the price. By the time you finish your months of sign hunting, the best of the homes you have found will have been sold already. Of course, you can just buy the first home you see that is okay, but how will you know whether you missed a home that is better suited to your needs at a lower price? There's got to be a better way!

Some home buyers first become interested by a home they see advertised in a “Homes for Sale” magazine or in the newspaper, perhaps in conjunction with an open house. Before you have spent very long studying the market, you will find that such ads rarely tell all. How can an experienced real estate agent or a home seller forget to mention in their ad that the home backs up to the Interstate or is shaded by high-voltage electric lines, or both? Once again, you are spending time investigating homes that sound good, but do not begin to meet your needs. Worse yet, the homes that are advertised only appear occasionally, and some homes are never advertised at all. Once again, there must be a better way!

There is one way that driving around looking for signs, reading the ads, or attending open houses might be useful to you. If you aren't really sure you want to buy a home, spending time on these activities might be what you need to decide to forget the idea altogether.

One note about open houses: Recognize that the real estate agent conducting the open house would like to sell you that house or at least sell you another house, any other house. After all, what kinds of people attend open houses? The reasonable answer is, those who wish to buy. Don't be shocked if the agent makes this assumption about you. Make it clear whether you are just surveying the market or if you do not want to be contacted later by the agent. Most agents will honor your request readily because they do not have time to waste calling people who do not want to be called. Be prepared to identify yourself on the agent's guest register. Most open house visitors understand the procedure and comply with it.

Whether you are looking for a brand new home or a resale, searching on-line can be helpful. Most new homes are computer searchable in our MLS system, regardless of whether the builder is large or small. An interesting and fun way to investigate homes for sale is through MRIShomes.com, which includes photographs of homes. Details are limited, but the Internet can introduce you to our local real estate market without a lot of effort. But as you will see later, there is much more to a successful purchase than merely finding a home.

The most important decision in the home buying process is who, if anyone, will assist you. The majority of home buyers use a real estate agent, because most recognize that the most efficient way to find a home is with an agent. The agent can search the MLS computerized database and quickly determine which of the thousands of available homes most closely meet your needs. This must be the better way!

Searching for homes in the MLS is the most efficient and productive way to house hunt. All homes with too few bedrooms or too high a price will be eliminated from consideration. You will spend your time seeing only the best possible candidates. Furthermore, an agent can set up a geographically efficient tour of homes that can be seen at your convenience. This way you can see 20 or 30 homes in a day if you wish. You will find that as you search for a home, seeing the nice as well as the not-so-nice homes, you will be building your own wealth of market knowledge. This will provide the comfort you need to select your next home with complete confidence.

Only real estate agents have access to the up-to-date market information in the MLS. News reports and classified ads cannot approach the timeliness or specificity available to agents. Also, real estate agents are involved in home sales much more frequently than the average home buyer. Compared with even the most informed home buyer, agents have a much better idea of what to say, when to say it and to whom. Expert agents also know what not to say, which can be of vital importance. A do-it-yourself home buying job that seemed so simple at the outset can become a nightmare due to unforeseen complications.

Does this mean that you really will need to deal with a real estate agent to buy a home? Horrors! Actually, you might be surprised to find that the average real estate agent is not a monster. Most can smile and behave pleasantly, if put to the test. A few have even earned the coveted “human being” designation. A concomitant benefit of selecting a real estate agent of your very own is that you can use the association to fend off overzealous agents you might encounter at open houses or parties.

Customarily, it has been home sellers who have had to agonize over the choice of a real estate agent. But today's informed buyers are treating their choice of an agent just as carefully. The reasons for this will become very clear. So forge on and learn how to select the best agent for you.

If you are a move-up or move-down buyer and have retained a listing agent to market your existing home, you should give that agent first consideration to help in your local home purchase. If you do this, it is strongly recommended that he be retained as a buyer-broker, assuming that this concept has come to your area (more later). If you did not select the agent currently marketing your home with care, be sure not to skip Chapter 3. And now, a word on real estate firms.

Each individual firm has its own style and makes specific claims of achievement as well as promises of performance. But the choice of an agent is much more important than choice of a firm. The agent will play the central role; the firm plays a secondary role. Larger firms have the economic power to support more frills including agent training programs, but ask how the claims of superiority of any firm will directly benefit you.

When you use an agent to help you buy a home, you will have a choice to make regarding agency. You must decide whether you would like to work with a buyer's agent representing you and your interests, or a seller's agent representing the person you'll buy your home from. Here are your choices:

Buyer-brokers now account for the majority of sales. The buyer-broker option is recommended highly, for our area. The concept formalizes your relationship and, as you will certainly see, allows the agent to serve you better. A buyer-broker is able to use all available information and negotiating experience on your behalf, instead of against you.

But a buyer-broker needs only to have a current license to sell real estate. Special education, a special buyer-broker license, and special negotiating expertise generally are not required. In the next chapter you will learn how to ensure that your agent will be able to handle the job.

The best news about buyer-brokers is this: Buyers rarely pay for the services of their buyer-broker! The typical buyer-broker agreement releases the buyer from the obligation to pay any commission that is paid by the seller. Sellers are nearly always willing to pay a buyer-broker's commission. Review the pertinent forms and other available information; discuss the matter fully; resolve any questions; and make an informed decision. Whichever option you select, you can expect treatment that not only conforms to the pertinent legal requirements, but also is ethical and fair to all parties.

In view of the preceding considerations, you will agree that the choice of an agent is much more important than the choice of a firm. Bear in mind that while agents must conform to the policies and procedures of their firm, they are almost always independent contractors, not employees. They are not heavily managed or closely supervised. Agents “A” and “B,” who are both associated with Company “XYZ” might have ideas and methods of operation as different as night and day. Differences between real estate agents can be very important to you. Not all agents are created equal!

You probably have some idea of what you are looking for in an agent. No one should be considered unless he has made a full-time commitment to real estate and is available whenever needed. Of course, a successful agent is busy marketing homes and showing properties to other prospective purchasers. Nevertheless, your calls should be returned within a few hours, within a day at the absolute latest.

Most importantly, find an agent whom you feel you can trust and with whom you feel comfortable. Be concerned with your personal feelings of comfort: There is no way to accurately measure or quantify trustworthiness during the agent selection process. At many points throughout your home search and purchase, you will have serious talks with your agent. The process will go smoothly if you have a feeling of trust. Think of your relationship as a business partnership, but remember this: Your agent is the advisor; you are the decision maker.

In addition to a feeling of trust, it is equally important to find an agent with experience and technical expertise. Without this, you will soon find that your trust has been misplaced and your comfort level is near zero. Also look for people skills, personality, and the ability to communicate clearly.

Before we consider how to hire an agent who has the necessary qualities, we must find candidates to interview. Rather than calling at random, you might:

Use recommendations only to locate agents to interview. Do not assume that friends or the local sales manager can select the best one for you. After understanding the information in this book, you will be able to make a much better selection of your agent than anyone alive will.

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CHAPTER 3
SELECTING AN AGENT
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There are significant differences among real estate agents. Note that the average real estate agent is involved in fewer than four transactions annually. Does that low level of activity lead to accumulation of the expertise you need? But rest assured that out of the thousands of local real estate agents, there are several in your area who will suit your needs perfectly. While the questions below are important in any case, they are mainly directed toward selecting a buyer-broker to represent your interests and negotiate on your behalf. Agent selection is an involved process but the rewards are great. You can't afford a mistake.

You will need to ask many questions. Some are very specific, and there will be a right answer or a wrong answer. Others are asked to provide you with a feel for experience, philosophy, et cetera. To make a decision based solely upon one or two answers would be a serious mistake. Also, the questions should be used in the order presented. Recognize that although your prospective agent probably is accustomed to being interviewed by home sellers, being interviewed by a buyer will be a relatively novel experience. But the practice will become common as buyer-brokerage becomes more widespread.

Begin by screening agents on the telephone. It is best to mention that you will be talking to several agents. Be frank and accurate in your discussions, and you earn the right to expect the same in return. If there are special considerations associated with your purchase or if you have unusual financial problems or needs, share them in your initial discussions. The questions you should ask first deal with the agent's commitment to real estate.

How many hours do you spend on real estate each week? While anything over 20 hours a week can be considered full-time, an answer above 40 hours should be your minimum requirement. Agents do not punch a time clock, so direct verification is impossible, but by the time you are done you will have verified the reply.

How can I contact you immediately if necessary? Agent-to-agent and buyer-to-agent communications can become a critical issue without warning. You will be very glad you asked the question now. Timely communications can make the difference between winning your home of choice and seeing another buyer grab it, setting your search back to "GO." You need to be able to provide your agent with critical last-minute input when your offer is in competition with three or four other offers. Your agent should have a smart phone and the techno-savvy to handle email and text anywhere. Do not compromise here. Today's technology is just not that expensive. The under-equipped agent has not caught up today, or just does not want to be bothered. In either case, it can cost you dearly.

What days do you consider your weekend? The best answer is, “None.” Saturday and Sunday are busy times for serious agents. Everyone needs a day or two off once in a while, but any rigid schedule, even “every Wednesday and Thursday off” is incompatible with the nature of the business. While you are at it, ask whether the agent has any vacation plans in the next few months. If yes, ask how coverage will be provided.

The above are initial screening questions. Use them in a telephone interview to save yourself from a personal meeting with an obviously unsuitable contender. During your telephone calls, begin to develop an opinion of the agent's personality and general knowledge of the business.

Now you are ready for the personal interviews. These can be done in the agent's office or at your home. Most home buyers should meet with at least three candidates. During this phase, the agents will try to impress you with their suitability. Many will welcome the opportunity to address your perceptive questions.

The following set of questions deals with the candidate's personal record and experience. Make it clear that you are not asking about the history of the agent's office or of the real estate firm in general.

How many buyers are you actively working with? Less than two or three can indicate inexperience or lack of a full-time commitment. If the answer is greater than four or five, obtain assurance that there is enough time for you.

How many homes have you sold in the past year? More is better, but an answer greater than ten probably is sufficient to provide an acceptable level of experience. It reinforces a full-time commitment claim and should reasonably support the answer to the previous question. Most agents also work with sellers, which provides complementary experience.

Is there an initial retainer fee for your services? Usually you will pay nothing. Even for buyer-brokerage, the fee or commission will be usually be paid by the seller. What a steal! But it is possible that an agent might ask for an initial retainer fee. If this is agreeable, it should be fully refundable at closing.

As a serious home buyer, you do not want to waste time. Your agent's computer literacy is one of the most important factors. The best way to find available homes is to have an agent search the MLS. It is a lot quicker than attending open houses or chasing real estate signs. That is why well over 90% of all homes are sold this way. But real estate agents, like the general population, include a diverse mix of personalities and capabilities. Some adjust to change; some fight it. Some are born computer nerds, and some will never know the difference between a bit and a byte, or between baud and bawdy. A few well-placed questions will help.

What kind of computer equipment do you have at home? Talk a little computer-eze to get a feel for the candidate's comfort level.

What are some of the critical decisions involved in searching the MLS to find a home? This might be hard for you to check, but see APPENDIX E and familiarize yourself with the Category D criteria: Even though some data fields might be searchable, their entry into the system might be optional; and subject to interpretation, judgment, opinion, and inaccuracy. Searching these optional data fields can be seriously misleading. Your agent has to think like a computer in order to find your home in an efficient manner. Like life, there is no substitute for experience and good judgment. Be sure your agent knows how to work the MLS like a champion.

By now you should be on a roll. The next set of questions helps you determine if the candidate has the market knowledge for the job at hand.

What is the upper limit of what I can afford? An experienced agent can estimate this for you in just a few minutes. The answer will demonstrate the agent's familiarity with real estate finance. Whether you stretch to your upper limit or opt for a more conservative purchase is your decision. In either case, it is valuable information to have at an early stage.

How much can I expect to negotiate off current asking prices? This question measures fundamental understanding of the market. It also provides valuable information on what price range you can realistically consider. The correct answer in most cases is “2% to 5% off the asking price.” But be careful, this figure assumes that the home under consideration is priced correctly. While this is likely, it must be verified independently before an offer is made. The percentage also can vary significantly according to the strength of the market. Ask for a recent assessment of market strength from each candidate. You will learn a lot with this question.

Can we find out when a home was bought and what the seller paid for it? The answer is yes in most cases. Every experienced agent knows that this information is available. Your candidate agent should also offer the suggestion that this information is irrelevant in many cases.

How will we determine a fair price to pay for a home? The agent should describe the information available in the MLS computerized database on comparable sold properties, including the asking and contract prices, and should summarize how the information will be utilized. Did the agent offer to do an appraisal-style market analysis? If you will be getting a mortgage, the lender will require a professional appraisal to independently verify the home's value.

How should the price be set for the initial offer? This question should lead to a general discussion about how the initial offer relates to the final offer (or the highest price you would pay for a home) and how you can avoid ending up there. The time a home has been on the market could be a factor and this information is often available through your local MLS database. Since the discussion will be highly hypothetical at this point, listen for an answer that demonstrates suitable negotiating experience.

How is a home's tax assessment related to its market value? Many people today are convinced that market values can be somehow predicted by government tax assessments, (not to be confused with professional appraisals). Of course, an average relationship between tax assessments and contract prices of recently sold homes can be calculated easily. But the idea that a government employee sitting in an office with some records and a computer could predict the market value of a specific home is ludicrous. If this were true, the entire professional appraisal industry would be out of business. See APPENDIX C for typical data and a detailed explanation. An agent who puts stock in tax assessments is dangerous: You will either be offering too high or too low a price. Either will be to your disadvantage. The wrong answer to this question should disqualify a candidate.

What about those web sites which give a home's value? Those catchy web sites are designed to sell you something. Did you notice the ads? If they get the value of your home correct, it's an accident: Read their disclaimers! Mortgage lenders use State licensed appraisers who visit a home before estimating its value. Many classroom hours and thousands of hours of apprenticeship are required become State licensed. Appraisals cost $350 and up. When mortgage lenders start relying on those catchy web sites instead of appraisers, you can be impressed. But don't hold your breath. Is your agent candidate tuned in?

How many homes do you expect to show me before we find the right one? This question is another check on experience and provides insight so you know what to expect. The number varies widely but a reasonable response is “between 15 and 50” homes. The experienced agent will have such an answer. It is important that the agent is willing to show you enough homes for you to gain a personal knowledge of your segment of the market.

How many homes can we expect to see in a day? In most major markets, the answer should be at least 20 and as many as 40 homes. For higher-priced homes, there are fewer to see, but more time must be allocated to each. You might want to see only four or five homes a day, but the question is designed to verify the agent's expertise, ability, and willingness. If you do wish to see 20 or more homes in a day, it is entirely possible.

The next questions are of greatest importance if you are interviewing candidates to become your buyer-broker. They deal with the agent's negotiating record and will give an indication of negotiating skill. Do not omit these questions. A favorable response is mandatory. The answers have a direct bearing on the cost of your home and can mean tens of thousands of dollars to you.

What is the selling price to asking price ratio for homes you have sold as a buyer-broker? In other words, how much money are you able to save your buyers? The answer is too important to rely on an estimate or recollection. Be sure to see some written tabulation of data from the agent's recent buyer-brokerage sales. Experienced agents will have established a track record. The agent who is monitoring his own performance is one who cares. Choosing the right agent can make a great difference in what you will pay for your home. If you do not ask, you will never know.

What is the industry's average selling price to asking price ratio? Every knowledgeable agent needs to have some idea of this ratio whether working with buyers or sellers. It also has great value when setting the maximum price for MLS search purposes, after you have an idea of the maximum price you wish to pay for your home. The correct answer is usually around 95%. APPENDIX D shows how to determine the current figure. Compare the result with your candidate's personal record established in the question above.

By now your candidate is in awe. Are you an agent? Where did you ever learn so much about real estate? Don't tell! Optional questions of lesser importance follow.

What is special or unique about your firm that will directly enhance my home buying program? Whatever the answer, many special programs are not unique to any one firm. Score a few extra points for a firm that has many offices.

Do you specialize? If your candidate makes such a claim, find out how it benefits you. Remember that your final search area could be entirely different from where you begin looking. Try to find an agent who is comfortable and experienced over a wide area. With modern technology and a little ambition, it is very easy to cover the entire residential market of several counties. Ask yourself why an agent chooses to be self-limiting by specializing in a small area or by working with only buyers.

Are you licensed as an agent or as a broker? Most states have two classes of real estate licenses. A broker's license usually requires more education, testing, and experience.

Did you win any sales awards last year? Most firms as well as local Realtors' Associations give awards. An award can help substantiate an experience claim.

Have you earned any professional designations? These generally are based on classroom education. While professional designations are valuable, remember they are not a substitute for experience. Were the designations earned recently?

The following questions can be left unasked. You'll find that they aren't very helpful, and the answers can be misleading.

Can you supply names of references? This is probably not worth the effort. You already know far more than anyone else does about your candidates. Why let someone else make your important decision?

How big a car do you drive? While the car size or its make might be an indicator of the agent's success, most agents will have a suitable vehicle.

The questions in this chapter will ensure that your agent has, without doubt, the experience, market knowledge, and personality to serve you well. In addition, you will be assured of your agent's communicating and negotiating skills, which are absolutely crucial to your success, especially in an area that offers buyer-brokerage. No doubt this has been an exhausting procedure, but rewards will accrue in personal satisfaction, time, and money. Once you have chosen an agent, you are on the road to success.

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CHAPTER 4
THE FINANCING JUNGLE
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It is very important to obtain an accurate idea of your home buying power at an early stage. Imagine a time-consuming but successful search for the perfect home only to find that there is no way to pay for it. Alternatively, imagine an even more time-consuming search that finds nothing suitable, only to learn later that you easily could have afforded to shop in a higher price range, where satisfaction would have been assured.

Only a fortunate few are able to bypass the mortgage loan process by paying all cash. This option is often an unwise choice, even for some who are able buy a home with their own funds. Most of our discussion will assume that you will be obtaining a loan. Getting a mortgage loan does not have to be a time consuming process if you are properly prepared. Be sure to ask the questions and understand the answers. The decisions you make could affect you for a long time.

You will need to define the maximum price you can afford to pay for a home, given the current economic state of affairs both nationally and personally. Some will buy a home at or near their maximum price limit. While many buyers do this, it is not at all unusual to opt for a more conservative purchase. The choice is yours.

We will explore your financing options to define your maximum buying power and narrow the choice of loan types to those most likely to suit your personal situation. Once you determine the right type of loan for you, defining your maximum loan amount should take just a few minutes. You will need up-to-the-minute information. Discuss the matter with a carefully-selected real estate agent or with a mortgage loan officer. Better still, talk to both. While it might be possible in some cases to actually apply for a loan at this stage (to obtain loan approval), some lenders will not proceed very far with a loan application until you have a contract to purchase a specific home. Most buyers need only to have a brief preliminary discussion for planning purposes. But if you will be venturing into an active sellers' market, being pre-approved for a loan can be a significant advantage.

There are several sources of mortgage loans. A few of the many, many possibilities are the following:

Private sources and mortgage brokers have the most flexibility and are ideal choices for borrowers with special considerations or problems; you know who you are. “Portfolio lenders,” which can be found in most of the categories above, will also have greater flexibility to handle special situations. Portfolio lenders are lending their own funds with no intention of selling the loans to others. They can therefore set their own guidelines without regard for what is customary in the secondary mortgage money market (not to be confused with second mortgages). If you have no special problems, you should consider all of the options above.

Most lenders will be offering similar loans, at similar terms, using similar guidelines. But similar does not mean the same. So, shop around for the best loan but get some assurance that you are dealing with a reputable firm. You should take special care to select a mortgage loan officer who is knowledgeable, is willing to take time to answer your questions, and with whom you feel comfortable.

Money for your purchase will come from your savings, with the addition of any money you can borrow. The sum of your own funds plus the maximum amount you can borrow will define your “purchasing power.” Remember that you are likely to need some money for closing costs, which can be 2% to 10% of the home's purchase price. Discuss closing costs with your real estate agent as these costs can vary significantly, depending upon where you buy, and they can be covered in various ways.

If your ready cash is limited, consider a contract provision for the seller to help with your closing costs by providing a credit at settlement. This can be a significant benefit if you are low on cash. Be sure to determine your lender's limit on the amount of any seller credit. Realize that the seller is not just going to give you extra money because you need it. You can be sure that the contract price will be more than it would have been without such help. The main effect of this maneuver is to minimize the amount of cash you will need at the expense of a somewhat larger mortgage.

First consider the amount of your own money that you will have for a down payment. If you are a lucky buyer with ample resources, just pay cash and skip the loan altogether. Before you do this, however, you might consult an accountant, a tax advisor, or a financial planner. For example, some cash buyers might be much better off electing to obtain a loan, after certain tax advantages are considered. Also, it can be unwise to commit an unduly large portion of your net worth to any single use or investment, even real estate. Consider the adage, “Don't put all your eggs in one basket.” In modern terms, we call it investment diversification.

At the other end of the spectrum, many buyers will commit as little as possible to a down payment. Despite the popular TV programs that explain how to buy real estate with nothing down, be assured that modern loan guidelines have pretty much put a stop to this possibility. Have you heard of the Savings and Loan Crisis? But if you are a veteran and can qualify for a VA (Veterans Administration) loan, you can buy with little or no down payment. There also are FHA (Federal Housing Administration) loans that generally require a small down payment. VA and FHA loans are known as “government loans,” because the loan approval guidelines are set by government agencies providing special guarantees to lenders making the loans. You will find that most lenders make both VA and FHA loans. The government does not grant loans directly, and neither the money nor the loan approval comes from government agencies. The maximum amount for a VA or FHA loan is somewhat limited so be sure to check the latest figure if you are hoping to take advantage of one of these programs.

There also are “conventional” loans that are not made under government guidelines. Nevertheless, government related, but private entities (nicknamed Fannie Mae and Freddie Mac) provide standardized guidelines for these loans. Conventional loans are either “conforming” or “jumbo” depending on whether the loan amount is below or above a certain set figure, respectively. One note: Be prepared to pay a slightly higher interest rate for the larger jumbo loan. Although this does not seem fair, it is a fact. There is no quantity discount when you're renting money!

A minimum down payment for a conventional loan is normally 5% of the purchase price. Other logical down payments are 10%, 20%, and 25%. Down payments of less than 20% might involve PMI (Private Mortgage Insurance): An extra monthly charge and possibly additional money at closing. Government loans have similar provisions known as MIP (Mortgage Insurance Premium) for FHA loans and the Funding Fee for VA loans. These extra payments flow into an insurance fund that reimburses lenders when a borrower defaults or fails to repay a loan. It must not to be confused with mortgage life insurance for the borrower (that's you) or fire insurance for the property. Some lenders have developed creative ways to minimize or even eliminate PMI payments. Ask about this possibility as it is now the rule rather than the exception.
To recap, regarding guidelines and limits, mortgage loans can be classified as:

Any of the above might be available at fixed or adjustable interest rates. Portfolio and private loan guidelines will vary from lender to lender.

Many lenders have special loan programs available, especially for first-time or low income buyers. Some of the programs are supported by State governments, some are supported by the lenders themselves. Ask about special types of loans that might be available to provide lower interest rates or minimize the cash required to buy a home.

The preceding discussion has been concerned with loan fundamentals as well as the amount of your down payment, which is limited by your own personal funds. The other factor limiting your home buying power is the amount you are able to borrow. This is determined by your personal income and debt situation.

Most lenders offer loans that are repaid over 15 or 30 years, but shorter and longer terms are available. Although 15-year loans usually have a lower interest rate, the 30-year loan is the most popular because the monthly payment is significantly lower. Fixed-rate loans will have an interest rate that doesn't change until the loan is paid off.

An alternative is an ARM (Adjustable Rate Mortgage). With an ARM, the interest rate will rise or fall periodically, based on a set of pre-determined criteria to establish the new interest rate. Some ARMs are fixed for the first three, five, seven, or even ten years. Therefore they behave exactly like a fixed loan during the initial years.

If you consider an ARM, you will become familiar with terms such as “index” and “margin,” which when added together, indicate what the new interest rate is likely to be. The index is a changeable, published indicator of interest rates, for example, the current interest rate paid to investors in a United States Government security known as the Treasury Bill. Another popular interest rate index is the LIBOR, or London Inter-Bank Offered Rate. The margin is an arbitrary, pre-agreed number that does not change, for example 2.5%. If the index is 3.5% when it is time for your loan to adjust, then the new interest rate will be the index plus the margin or 6% (3.5% plus 2.5%).

ARM borrowers will also need to know about caps or limits. Lifetime caps are limits (usually lower as well as upper) beyond which the interest rate will never vary. Adjustment caps limit the maximum percentage of any single adjustment. For example, a 2% adjustment cap would mean that your loan's interest rate could move no more than 2% in any one adjustment. Caps are important because of the protection they provide against drastic changes in the interest rate that could make your monthly payment suddenly unmanageable. But note well that even a 2% interest rate increase, say from 6% to 8%, can increase your monthly payment by over 20%.

An important note regarding ARMs: “Negative amortization” can occur when a cap prevents your paying the true amount that you owe. The resulting deficit is made up by an increase in the total amount that is owed. In effect, the shortfall in your monthly payment is just added onto the outstanding principal of the loan. Therefore, you could make payments all year and end up owing more at year's end than you did in the beginning.

When you are considering what type of loan will best suit you, the most important question to ask yourself is, “Self, how long will I be living in this home?” The answer for most people is between five and ten years. You need to know how long you will be in the home because that is a major factor in choosing a mortgage. On one end of the spectrum are fixed-rate loans. These carry the highest interest rates and give you least buying power, considering the amount you can afford to pay each month. But, fixed-rate loans are also more stable and “safe.” On the other end of the spectrum are one year (or even six month) ARMs. ARM loans carry the lowest (initial) interest rate and give you the most buying power. The difference is striking: A one year ARM might allow you to borrow 50% more than a fixed-rate loan at exactly the same monthly payment, assuming your lender uses the ARM's initial low interest rate in your qualifying calculations. Check this with your loan officer, as it is not always the case.

Note, however, that a one year ARM is probably not suited for anyone who plans to be in the home for more than three years, due to the uncertainty of future changes in the monthly payment. On the other hand, an interest rate fixed for 30 years will have no benefit for most buyers who will almost certainly sell the home and move on long before the end of 30 years. So why pay the higher interest rate associated with a 30-year loan? Also recognize that a higher interest rate lessens your borrowing power and will result in your buying much less of a home than you really could afford.

If you are trying to maximize your borrowing power and obtain the largest possible loan, there are a few things to consider. First, be sure you get the lowest interest rate by selecting an ARM that adjusts as frequently as you can handle. This would probably be a six-month, one-year or-three year ARM. Next, try to find a “buy-down” program. These programs sometimes involve somewhat higher initial charges, or discount points, but give a lower interest rate during the first few years. (One discount point is equal to one percent of the loan amount.) The lower initial interest rate of buy-down loans permits a higher loan amount. Such loans are ideal for those who expect their income to increase in the near future. Finally, some lenders are offering loans that are repaid over a period of more than 30 years.

If you find that your income will support a sufficiently large loan but you have very little cash to commit to a home purchase, then a shared-equity loan might help. (Some training in money management might help, too!) In a shared-equity loan, an investor loans you the down payment, usually interest-free. In exchange, you agree to share with this investor any gain, or appreciation, in your home's value over a certain period. The mortgage loan is then obtained from any willing lender. You occupy the home and pay the mortgage payment.

Shared-equity loans are hard to find when property values are not appreciating quickly. Nevertheless, a family member who is hesitant to make you an outright gift might provide you with a down payment in this way. If the idea is appealing, further investigation and discussion of the many details is required. A real estate attorney should be consulted in order to effect a shared-equity agreement.

If your relative is so inclined, an actual gift of a down payment from a family member is allowed in most cases. Check with the lender and obtain the proper form letter to be used. The essential phrase is that “repayment is not required.” Depending on your relationship to the giver and the size of the gift, the tax consequences of this action might need to be investigated.

One loan feature that is best avoided is a balloon payment. Balloon loans involve a large payment at a certain time. If you have a loan with this feature, be sure to sell the home, re-finance the loan, or inherit the family fortune well before the balloon payment is due. Otherwise, if the payment comes due and you cannot make it, your lender will foreclose; your balloon will pop and you will lose the home. Some balloon loans include an option to extend the loan after the balloon comes due, but you will need to investigate the details to ensure your complete understanding.

Also try to avoid a loan that has a prepayment penalty. This feature, which has become nearly extinct, periodically tries to make a comeback.

An alternative source of funds is owner financing: Getting a loan from the current owner of the property. The potential problem with owner financing is that individuals often do not want to tie up their own funds for more than three or five years. Therefore it's likely your payments will be unmanageably high or that a balloon payment will be required. This is equally true whether the owner is financing the entire loan or is just taking a second mortgage, or second trust, for a portion of the total loan amount.

If you have major problems obtaining a loan, consider assuming the current loan on the home. Very simply, you occupy the home and in exchange you pay the mortgage payment. But do not assume that an assumption is that simple. First, many assumable loans still require you to qualify for the loan. If this is the case, then one big advantage is lost. Second, many older loans carry higher interest rates than those currently available, so why assume an unfavorable loan? Third, many loan assumptions require a large down payment, especially if the seller has owned the home for a long time or has enjoyed significant appreciation. You might not want to commit such a large amount of your own funds to a down payment.

The following are important questions you should ask your lender about any loan:

If you are seeking pre-approval for a loan and you are not able to lock in your interest rate, you are in essence choosing a lender based on today's information. Things can change in the mortgage market, often without warning. So ask your lender, “If I find a better deal elsewhere, will there be any charge to transfer my documentation to another lender?”

Ask these additional questions about an ARM:

The fully indexed interest rate will always be somewhat higher than the initial rate quoted. Therefore you should plan that the first adjustment on your loan most likely will be an upward one, quite possibly to the limit. This is especially true for an ARM that will adjust soon, say in six months or a year.

When you return with a contract to purchase a specific home, ask the following:

You might feel that obtaining a loan is a bit of a hassle. But recognize that you are getting far more than just money. Because your lender will do all possible to safeguard his investment, your money will be almost as safe. Some examples follow:

In addition to requiring the safeguards above, your lender will provide you with an estimate of your closing costs, a “Truth in Lending Statement,” and other useful and informative literature.

While your monthly payment might seem oppressive, many buyers find it much easier to handle after just a few years. This assumes, of course, that your income grows and is not overtaken by any upward adjustments on an ARM or by other major unplanned expenses.

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CHAPTER 5
YOUR HOME SPECIFICATIONS
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There are thousands of homes out there to consider. Do you want to personally inspect them all? Of course not, but the MLS will allow you consider them all. So view your search as a process of elimination during which you are “homing in” (no groans please, you're getting more than you paid for) on the best abode for you. You must now develop an initial set of specifications to help your agent use the MLS computer in a meaningful and efficient manner.

Your agent can help you modify your input until the output includes a reasonable number of homes, more than 10 and less than 60. Somewhere around 30 or 40 is ideal. Don't worry; you won't have to see all these homes! Many will be eliminated from consideration once you review the details, thus saving you a visit.

Careful consideration of your options at this point will save lots of time and, by eliminating unsuitable homes, will lead you more directly to your new home. Recognize that if your home specifications are broad you will have hundreds of homes to see. To avoid this, tighten your specifications by adding requirements or constraints. If you get too specific, however, the computer will give you nothing to work with. Then, of course, you will loosen your specifications perhaps by considering smaller lots, fewer bathrooms, a different price range, or by widening your geographic horizons.

Every MLS search includes geographic boundaries. Remember something about location, location, and location? You will recall these are the fourth, fifth, and sixth most important considerations in selecting a home; right behind price, price, and price. While proximity to friends, relatives, schools, shopping, and recreation might be considered, the single most important location factor often is distance to work. This should be measured in minutes rather than miles. Rush hour can radically alter an easy 15-minute drive.

If you live in a major metropolitan area, the City is the center of the world. It is estimated that the average home gains $10,000 to $14,000 in value for each mile closer to the City. The obvious reason is that lots of folks work there, and they don't want a long commute. It's a wonder that we don't all live right in the City itself.

You will find that homes close to or in the City are generally older, smaller, on smaller lots, and cost more. These homes are older because land development started at a point (which eventually turned out to be center City) and moved outward like ripples on a pond. Close-in homes are smaller and are on smaller lots because that was the order of the day when they were built. Today, they cost more simply because of their preferred location, according to “the market.” The farther out you go, the newer and more affordable the homes are likely to be. It is not a case of right or wrong, just a question of what is the best compromise for you. Most everyone finds that the home of their choice is farther from center City than their place of employment. By golly, we have just demystified why traffic is heaviest going toward the City in the morning.

Every MLS search also includes a price limit. If buyers in your market are negotiating a discount from asking prices, your agent can safely search for homes priced a bit over your limit. For example, if the average selling price to asking price ratio is about 95% then the MLS search can exceed your maximum price limit by 5%. On the other hand, if buyers are bidding up prices in a hot sellers market, you will want to search for homes priced somewhat below your upper limit. This will give you room to compete for your home of choice. See APPENDIX D and ask your agent to determine the selling price to asking price ratio average for your market segment at this time. If your agent suggests showing you homes that are priced far above your price limit you need to ask why. This is no time to dream the impossible dream: It will quickly become the probable nightmare.

Remember that your seller will be an individual, not an average, and could demand full price. You won't know until you make an offer. The selling price to asking price ratio applies only to sold homes that were priced competitively and eventually sold. So the sellers who are asking $400,000 for a $300,000 home will probably not be getting $380,000. It is your responsibility to know the market value of the home you wish to buy. More later on how to establish this figure before making an offer.

If price is truly your most important consideration and you do not mind severely limiting your choices, ask your agent to search only for vacant properties. Some of these will be bank foreclosures, relocation-company-owned homes resulting from employee transfers, and properties owned by someone who has moved out and would like to shed the mortgage payment soon. Many of these properties will be priced attractively, or have sellers who are willing to negotiate, or both. But do not expect a gift. Every seller wants to get the highest price possible. These sellers differ from the typical seller because they cannot afford for the property to sit on the market unsold and they have little emotional attachment to the home.

Sometimes the greatest price flexibility is available in properties that are about to go to foreclosure. Many of these are “short sales” which can be tricky:

But back to the mainstream. You will find it is most efficient to search the MLS for homes priced in a range near your upper price limit. The lower limit of your search range should be about 10% to 15% below the upper limit. For example, if your upper limit is $400,000 the lower limit should be $340,000 or $360,000. This range is broad enough to include the rare bargain that might be out there waiting for you. There is no need to search for less-expensive homes, as they will never compare to the homes priced nearer your upper limit. If you do get on the road and see a dozen homes that are more than you need, ask your agent to search in a lower price range. However, buyers rarely need to make this request. If the absolute lowest price is your objective, try Sears: They don't sell home kits anymore, but they likely still have a Spring sale on wall tents.

Most buyers know whether they want a detached home, a townhome, or an apartment. If you will consider them all, then go ahead and give them a look. If you purchase a detached home or a townhome, chances are good that you are buying the land on which it sits. Think of a condominium purchase, however, as merely buying your living space. You will own no land of your own. The distinctions between architecture and land ownership are usually apparent when considering detached homes or apartments. But something that looks like a townhome architecturally might sit on its own land or the land might actually be owned by a condominium association. Be sure you know the details of properties you are considering. Condominiums involve monthly fees. In exchange, the condominium association is responsible for a long list of expenses, usually including exterior building and grounds maintenance, water and sewer, trash removal, and fire insurance. Be aware of the ownership type, what you will be paying, and what you will be getting.

For obvious reasons, a minimum number of bedrooms and bathrooms are used frequently as constraints in a MLS database search. You might also limit your search to two-story homes, or perhaps you will demand the convenience of a one floor rancher, known as a rambler in most parts of the country. Split-foyer homes (also called raised-ranchers) are sometimes less popular than other styles, but these homes can be quite nice. Other buyers will find the separation and spaciousness of a split-level home or the open floor plan and distinctive exterior of a contemporary home is just right for them. Cape Cod homes are two-story homes with floor plans that are often similar to standard two-story homes. If style does not matter to you, see them all!

Some buyers will demand a large lot to obtain privacy, or room for a pool or even horses. Others will accept nothing but the smallest lot, to minimize yard work. Should you include a minimum or maximum lot size in your search criteria? Perhaps you will buy a condominium and eliminate the yard work completely. A home for every buyer and a buyer for every home: They find each other eventually.

A home's age is another common search criterion. Some buyers desire the hardwood floors, brick exterior, and established look of a home 35 years old or more. Others will consider only newer homes. Most modern home designs often include large gourmet kitchens with islands, large master suites with luxury bathrooms, skylights, and vaulted ceilings.

For some folks, the idea of a brand new home is overwhelmingly attractive. But new homes are often on smaller lots, and affordable new homes are probably far from the City. If you do not need a close-in home and can wait for construction, you should at least investigate a new home. But remember, when you eventually sell, your once-new home will be a “used” home. Many who have sold a brand new home after a short time have taken a loss, because new homes command premium prices in many of today's real estate markets.

One important factor that might be difficult to deal with is home size or square footage. If a figure is quoted, it can be misleading. Therefore this information should generally be disregarded. Many buyers find that room arrangement, proportions, layout, and wall space are more critical than size alone. If you have a need for a specific room size, for example to accommodate your heirloom dining room table, your agent might be able to search only for those homes with a dining room larger than 15 by 11 feet. But if room size is an optional data field in your local MLS system, this won't be a reliable way to search. In addition, most computers will not know that 11 by 15 feet is equal to 15 by 11 feet and some acceptable homes will be omitted. Your agent needs to know that the other (listing) agents' data entry quirks can cause such problems. Refer to the discussion of computer literacy in Chapter 3.

APPENDIX E should be reviewed at this time, paying particular attention to Categories A, B, and C. Use this part of the Checklist now, to ensure that important criteria are included in your MLS search. Your objective is to eliminate only those homes that clearly are unsuitable.

There are many other factors that can only be evaluated by actually visiting a home: Whether it lies in the shadow of high-voltage electric power lines; whether it is in good condition and nicely decorated; whether the next door neighbor is running an automobile junk yard on his front lawn. Without a visit it is even hard to tell if a home is too close to a major highway or if it really is on a wooded lot. What is the definition of “wooded” anyway? Go, have a look, and then decide for yourself.

Read each home's MLS description and look up the location on a map. Sort out the homes that are clearly unsuitable, and plan to see the rest. In the meantime, don't get too attached to a description that seems to portray your dream home. You'll need to see it to believe it. Your agent will put the homes worth seeing into geographic order for an efficient tour, and it will finally be time to hit the road.

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CHAPTER 6
ON THE ROAD
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Up to this point you probably have invested eight to ten hours in the home buying process. Now it is time to leave the planning, numbers and theory behind and actually see some homes. You will soon realize that the time you spent planning will be rewarded. You will save time, and you should be able to find and purchase that perfect home (or the best home available) quite efficiently. As you visit homes, reflect on your planning. Try to confirm that you are on the right trail. If you need to change the direction or focus of your search, don't wait too long.

While your agent will handle many of the details, he will not be signing your contract, moving you, or paying your monthly mortgage payment. So stay awake! What is your objective? Obviously, to find a home; but remember that you are also building your own market knowledge. When it is time to make the choice, no one in the world will be better equipped than you will. Along the way you might even have a good time. Give it a try. You really can see 20 or 30 homes in a day, even spread over a wide area, if the tour is arranged in proper geographic order. This is a bit tricky, but your agent is an expert, right?

There is a lot of MLS information on each home. Much of it will be useful, some of it irrelevant. Most of it is labeled with abbreviations. You quickly will learn where to find the important bits of information. Ask your agent to help you understand the abbreviations and acquaint you with the variables and structure of the database. If the information available includes a picture of the home, resist the urge to judge a home by the photo.

MLS data often includes a key to standard area maps. Be sure to have a map for any area you visit. As you are driving to see each home, locate it on the map. Is its geographic location convenient to major roads, shopping, schools, and work? On the road you can evaluate the second facet of location, location, location: The neighborhood you select. Are the homes well maintained and is the space between properties acceptable? Are there homes of various styles? Are the residents predominantly from one group? Older? Younger? Children? Do you care?

The third and equally important facet of location is the home site. Is the lot large enough? Does it have enough useable space for your purposes? Is the home properly situated on the lot? Is the home similar in value to surrounding homes? Does it fit with its surroundings? Is it free of noise from roads, railroads, and airplanes?

As you near the home, develop an impression of the general area. When you arrive in front of the home, you have already collected a lot of information. Would you be happy coming home to this? Do you see the front of the home as you approach? Is it good looking? You do not, of course, live inside “curb appeal,” but it is an important factor to you and your future buyer.

If the home has failed the first-impression test, ask yourself if the home is of acceptable design, well proportioned, and well sited. These factors would be difficult to modify. If your answer is “No,” then do not waste your time going in. Drive on to the next home. Your agent can politely make your apology. Yes, the seller might have spent an hour getting ready for your visit, but that is not a good reason for you to waste your time and possibly give the seller a false sense of hope. On the other hand, if the home's ugliness is due to poor landscaping or an unacceptable color, these things are changeable if you are willing to pay the price. Perhaps you should have a quick look inside.

Eventually you will drive up to a home that you will want to inspect. Hopefully the interior will be spotless and decorated to your taste. Finally, a home that lives up to its “SHOWS LIKE A MODEL” promise. Good luck! More than likely there will be some negative features lurking inside the home. Try to look past the sink full of dirty dishes and the messy teenager's room with rock'n'roll posters for wallpaper and dirty clothes for a rug. Do these sellers need to meet a vacuum cleaner? This home makes a mockery of the claim “SELLERS ANXIOUS.” But the contract will probably guarantee you a home in reasonably clean condition on closing day.

Notice the decorating. Are hot pink or bright yellow bathroom tiles ever coming back into vogue? Do you like the flocked wallpaper that features large fancy shapes, each with its own embossed fire-engine-red tassel? Of course, the threadbare carpeting is going out of style, and out the door. These things can be replaced with your personal choices, brand new and up-to-date. But most buyers are unwilling to deal with any major work. If you feel this way, too, then you are definitely in the majority. So recognize it and you are off to the next selection on your tour. But if you are willing to see past the decorating and the mess, you might buy this home for a very good price because it will appeal to very few others. Even a home with serious flaws might be fixed for a reasonable cost, but be sure to get an expert opinion before you are under contract.

It should take you less than ten minutes to inspect a home. Whether you like it or not, make a few notes of the most important factors and perhaps a memory jog such as: “The home with the orange-fur toilet seat” or some other memorable feature. Do not write a book, even if you love the home. You could be compromising your negotiating position if the seller is at home. (Besides, the world does not need another book on real estate.) Also, there are other homes to see, and the next one might be even better. The main question you are trying to answer is, “Do I ever want to return to this home for a second visit?” Once you know the answer, it is time to go.
While you are inspecting a home, point out to your agent the features you like and those you do not. Your agent's expertise regarding negative features of a home can be invaluable. Recognize that he is there to help you and will rarely give a hoot which home you buy, as long as you are happy with the home you choose.

Do not offend the sellers by making negative comments in their presence. Be tolerant of those sellers who feel it is their duty to show you through their home in spite of their listing agent's warnings to the contrary. If you encounter this, you immediately will learn that the seller has a firm grasp on the matter: “...and this is the living room,” the seller will proclaim proudly. Most of the time you will indeed be in the living room.

Pay careful attention to your demeanor and words when in the presence of the seller. Smile and act friendly, but keep your comments to a minimum. Avoid telling the seller that you have just fallen in love with his home and that you must have it at any cost. This would be less than clever, but it does happen. Comments about your price range or timing can also compromise your position. If you are dying to have a swimming pool, do not admit it. If the seller is talkative, you might gain some important insight. Feel free to listen, but try to keep your comments to a minimum. At some point you or your agent should try to learn why the seller is selling and when he hopes to move. But avoid asking the question, “How soon can you move?” Note that the wording of this question gives too much information about your position.

It is your responsibility to keep the homes you have seen in perspective. Your agent can be a great help, but cannot make your decisions or make your notes while he is driving. One valuable aid: After you have seen a few homes, keep the best one or two clearly in mind. Compare each successive home you inspect with these first and second choices. If the home you are inspecting is better, then you have found a new first or second choice. Otherwise, forget the current home and proceed with your tour.

If you inspect, ask, listen, think, make notes, and remember details, you will be able to choose the right home. If you find a home you like right away, that's great. But even if you view 20 or 30 homes you'd never buy, this is progress. It is a process of elimination. You are developing a short list of a few homes that you will visit again and consider carefully. If you tour homes just waiting for that special one to “jump out at you” without making careful notes, you will end up disappointed at the end of your search. You will probably find that everything is a blur, nothing jumped out at you, much time has been spent, nothing has been accomplished, and you are standing back at “GO” not even having collected your $200. Also, you might find that your agent does not want to go back to see all of those homes a second time, even if it was fun.

If you have seen a few examples of a certain style of home and are convinced that style will not work for you, maybe because the family room is separated from the kitchen and you will not be able to keep an eye on Junior while preparing dinner, ask if similar homes can be deleted from your future tours. Perhaps you will find an area or subdivision that you especially like. Your agent can probably develop information on every available home in that subdivision for you. Use what you are learning on the road to tailor your tour as you proceed.

The choice of a home is very personal. Many factors are readily apparent, such as the age, lot size, or number of bathrooms. Many are not. For example, the feeling you had inside the home or in the general neighborhood. Perhaps you can rate your feelings on a scale of one to ten. The more questions you ask yourself and the more you quantify pros and cons, the better choice you will make. You might even design a check sheet to take on the road to help you collect the important information. Just remember to keep it simple. If you try to record more than 8 or 10 factors, the process will soon become unmanageable.

Use your agent's knowledge. No one can make your choice for you, and your opinions certainly must come first. But your experienced agent has a wealth of information on how “the market” views certain factors. Consider this information carefully if you want your home to be a good investment and to be marketable when the time comes to sell. The more you discuss, the more information you'll have to make that important decision. So talk to your agent in each home as well as in the car.

By the time you have seen 10 or 20 homes you will have developed first-hand knowledge on your segment of the market. During the search, some features you thought you wanted may have become unimportant. On the other hand, you might have seen some features during your tour that have become requirements. Hopefully, the time you spent in the planning stage has paid off and you have not had to make a major adjustment in your specifications. Many of the homes you visited have been clear rejects. Believe it or not, someone else will buy them some day. It is time to develop your short list of the properties that will receive very careful consideration.

Now that your list of homes has been narrowed to a few, your list of important features can be expanded to a dozen or so if you wish. You should return to each home on your short list to collect all the information you need. Some buyers even check clothes closets to determine how many of the owners are currently living in the home. Make careful notes of any important questions. All the homes should be revisited in one day. If you need to get someone else's opinion of these homes, bring them along for your final tour.

As you visit each home, ask yourself whether you have a comfortable feeling. You might sit quietly for a few minutes in your favorite room. If you are not comfortable, there may be something negative reaching your senses but avoiding your consciousness. If you can determine exactly what the problem is, you can decide whether this hurdle can be overcome.

During this round of final visits you might be able to eliminate some of the homes. This is progress. If you are lucky, one or two of the homes will stand out from the rest. By the time you are done, your short list probably will be shorter and you will be in a position to make your choice.

Note well: This Chapter describes an orderly process for circumspect buyers in most market situations. However, in a hot sellers' market, you will need to complete your entire evaluation and decision in a 20 minute visit to a home. There are others out there who will buy a nice, well-priced home in a day. So, if you have to think about, you might as well forget it! If you do decide to join the fray, be sure to study Appendix J.

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CHAPTER 7
MAKING THE CHOICE
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If you are lucky, you have found the perfect home and have fallen in love with it. But be prepared to make some compromises. The very best home for you will probably not be absolutely perfect in every respect. Unscientific studies have proven conclusively that most buyers would find true happiness in a home priced $100,000 above their upper price limit. But you are stuck in the real world with a real choice to make, and it might not be easy.

As you consider various properties, try to give greater consideration to the unchangeable features of the home, for example; the location, the style, the lot size, the layout, and size of the rooms. Of less importance are the changeable features, the missing patio or deck, unfinished basement, or the decorating that makes you gag. Hardwood floors, a fireplace, and sometimes a garage can be added, if required, to an otherwise suitable home.

If you will eventually sell your home, and most buyers will be sellers within ten years, take time to be concerned now. If you buy a typical home now, you stand a better chance of selling it later for market price in a reasonable time. If you buy a home that “makes a statement” you will someday be searching for that unique buyer who wishes to make the same statement. And history proves that this type of unique buyer desires to make their statement at a deep discount off your asking price! Basic features desired by buyers in most metropolitan areas are a private master bathroom, central air conditioning, availability of cable TV, and a basement.

The typical detached home has at least three bedrooms, at least two bathrooms, central air conditioning, a garage, a fireplace, and a family room or recreation room. The typical townhome has three levels, three bedrooms, two and a half baths, central air conditioning, a fireplace. There has been a strong trend toward garage townhomes for many years. Determine what the most popular style of home in your local market is. The closer your home conforms to the norm, the easier it will be to sell some day.

Many people do not buy the typical home, and you do not have to either. But you need to know where the mainstream of the market is flowing, whether or not the typical home is right for you. There are many excellent values in non-typical homes. Many buyers do not need four bedrooms and two and a half baths. They might not need a garage. So why pay for what you do not need or let “the market” make your decision? “The market” will not be living in your home every day or paying your mortgage every month. It is a very personal decision, so make sure it is right for you.

Some features that are popular in today's homes are large gourmet kitchens; large master suites with luxury bathrooms; and vaulted, cathedral, or high ceilings. Many buyers prefer large windows with double panes. A patio or deck is also a popular feature. Larger homes are usually, but not always, preferred over smaller ones. Minor differences in home size are often overshadowed by details of the floor plan. A quiet, pretty location that is convenient to major roads and shopping is ideal for many buyers. A home with a view is very special. Do you have a preference for homes located within a large subdivision or with a community pool? Good schools are important to many, but a universal definition of good schools is as elusive as a universal definition of a good home. Some buyers prefer gas heat, but this requirement can be a very limiting constraint in some areas. Any one of the preceding considerations is rarely a controlling factor in a home buying decision.

Daylight or walk-out basements and lots that abut parkland are popular. But in some areas of the country these features are considered a security risk. Light and bright homes are sought after, as are wooded lots (when possible) that give a home a pleasant appearance. Unfortunately, a home nestled on a heavily wooded lot probably will not be light and bright, at least not for a good part of each year. This is another compromise for you to contemplate.

If you are considering a new home, you will have questions about the builder. Fortunately, new homes are constructed in conformance with voluminous local building codes and are inspected by local authorities several times during the construction process. While this does not ensure that every new home is perfect, it does establish minimum standards. It is likely that most new homes will still be standing years after construction.

An important factor to investigate is the builder's attention to finishing detail. Were the trim woodwork, painting, fixtures, and flooring installed carefully? If care was taken on these items, it is likely that what is underneath is also acceptable. Does the builder keep delivery promises? These are almost always verbal, or are written with a wide margin of flexibility. But remember the builder wants to go to closing as much as you do; probably something to do with getting paid. How about service after the sale? This can be more important than your written warranty. The builder's sales agent on site surely will have all the answers. You can verify the agent's claims by talking to a few of those who have already moved into the builder's new homes. Do not be alarmed by any single, unverified negative comment: Some people have nothing but problems.

In a few areas of the country, lots set back from the street on an internal parcel of land share their driveway with another home. While some buyers favor these sites for the quietness and lack of traffic, other buyers worry about:

None of these factors is insurmountable, but one serious flaw is coming out of one's front door and being greeted by the neighbor's rear deck a mere 30 feet away. You do not want to have to sell this particular type of home later, nor does your agent.

Buyers sometimes ask about the differences in tax rates from one jurisdiction to another, the local crime rate, and a home's utility costs. If you carefully investigate any of these factors, you probably will find no differences significant enough to affect your buying decision. Placement of furniture in the home is a consideration for some buyers. But if this becomes a seriously limiting factor in the decision, reexamine the value of your furniture, sentimental as well as monetary, compared with the importance of your home choice. In most cases, it is suggested that you do not rule out a home simply because some of your furniture will not fit.

In making any complex and important decision, the key to success is assembling the pertinent information. As your home choice decision nears, an endless series of questions will pop into your mind from nowhere. Take each one seriously. Any one question could be a deciding factor. Take a moment with each question to ask yourself where the answer can best be found. To whom should the question be addressed? It might seem natural to ask the seller of the home or your real estate agent about the quality of the local schools or about the vacant land adjacent to the property or the crime rate. But this is the easy way out and you can often be misled unintentionally. Be sure to address your important questions directly to those with the answers.

If schools are important, visit them; talk to teachers, administrators, parents, and students; collect published information and make your judgment. Many school systems post valuable information on their Internet site. Call for the exact address or URL, most are not intuitively obvious. Ownership of vacant land is best determined through local government: They have to know who gets the real estate tax bill. An obvious source for crime rate information is the local police department. If they do not have the facts, no one else will. These are just a few examples. If you have an important question, be sure to get the right answer. Go to the source and talk to the experts. You would not ask a teacher to help you find a home so do not ask your real estate agent about schools. Alternatively, if your question is not that important, put it out of your mind rather than pursuing an answer that does not matter.
Ask your agent to search the MLS for all of the properties in the areas or subdivisions containing each home on your short list. This information should include sold properties as well as available ones. There is a wealth of important information here. Does the price you are likely to pay fit in with the information on similar sold properties? Is the home you are considering the most expensive or least expensive home in the area? Least expensive is better, but if the home in question is not more than about 10% above the top of the range, you should have no reason to worry.

Look at the information discussed in the preceding paragraph. Use a procedure similar to that described in APPENDIX F to calculate the number of months supply of homes on the market for each area or subdivision under consideration. Compare the months supply figures you have calculated for each area. Lower numbers indicate homes in that area are selling well. Sellers who are aware of this might be somewhat less negotiable. A lower number could be advantageous if the popularity of the area continues until it is time for you to sell. Higher months supply figures mean sales are sluggish. Again, this might have an effect on home sellers. Recognize that your calculations are based on a very small number of available and sold homes and the results provide only a coarse analytical tool. For example, the difference between a 4.5 month supply and a 6.5 month supply might be meaningless, but perform this calculation. Significant differences can exist and you can use the information.

If you are considering a townhome or condominium you might be concerned with the stability of the complex. Hopefully, earthquakes and mudslides are not a major concern; but determine the number of units that have new occupants. Ask your agent to obtain the MLS rental information similar to that discussed in the preceding paragraphs. Add to the number of units rented in the last year to the number of units sold in the last year. Then divide the total number of units changing occupants in the last year by the total number of units in the complex you are considering. Compare the calculated figures for each complex to get an idea of resident stability. This line of reasoning is rooted in the idea that resident turnover is disruptive. A 30% annual resident turnover in a subdivision of five-acre estates might be worrisome, but not disruptive. A 30% annual resident turnover in a high-rise condominium might mean you have to wait a week to board the elevator.

With a condominium, your lender probably will investigate the percentage of units that are rented. Too high a proportion of rented units might make a lender hesitant to lend mortgage money for that location. Lenders keep lists of condominiums that are approved for lending purposes by various agencies. While this is not usually a problem, some investigation might be in order at this stage. Either your real estate agent or your mortgage loan officer can help.

APPENDIX E should be reviewed at this point to ensure full consideration is being given to all criteria that are important to you. Here's another aid to help you in paring down your short list to one or two homes: Try the “Ben Franklin approach.” Take a sheet of paper (or your computer spreadsheet) and divide it down the middle. Using a separate sheet for each home, list advantages on the left, disadvantages on the right. Consider the relative importance to you of each factor listed, giving more weight to the important items. With a little luck, you are now ready to make an offer on your next home. If you cannot make a decision between the last two homes on your list, flip a coin. Consider yourself lucky and forge ahead, with two equally suitable homes, you are in a superb negotiating position.

The choice of a home is a very important decision and should not be rushed. But once the choice is made, you should proceed without delay. Keep in mind that other active buyers probably share your home preferences and market knowledge. The home you have carefully selected will also appeal to them. Your risk in delaying an offer or stalling during negotiations is that another buyer will make an offer on “your” home. Do not discount this risk. It happens more often than anyone would guess, even when a home has been on the market for many months. You do not need the aggravation of competing with someone else to buy the home of your choice and you certainly do not want to start from “GO.” So act now.

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CHAPTER 8
THE NEGOTIATION PROCESS
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Negotiating your contract will be the most challenging and exciting part of your home buying experience. It will be satisfying to see the effort you have spent planning, searching the countryside, mapping the strategy, and executing the plan come to fruition. The most important part of your agent's job is managing the negotiation to a successful conclusion. You might visualize the negotiation process as traveling down a road.

The beginning is marked by your proposal or offer to buy a home. You have complete control over the timing and content of your offer. Your objective is a contract to purchase the home you will live in happily ever after. Of course, your goal is not the negotiation or the contract itself, but the living happily ever after. The contract must be mutually acceptable to both buyer and seller, a meeting of the minds. If it is to be legally enforceable, and this is highly desirable, it must be written. You can have a good deal of control over the final content of the contract, and you will exercise this control with the help of your agent during the negotiation phase. But the road can be filled with bumps and potholes (surprises), can wind up hill and down dale (confusion and emotion), surely will contain many forks (decision points), and could run close to steep cliffs.

You might recognize at this point that it would be rather cumbersome if we had to negotiate a written contract every time we wanted to make a purchase. Imagine a contract for buying a loaf of bread! So, why is a contract needed to buy a home? One difference is that loaves of bread tend to be pretty much the same, and you are pretty experienced with buying them. Bread prices also tend to be rather fixed there's no room for negotiation. A home's price is less certain, hence the need for negotiation. In addition, home purchases are complex and involve many details, hence the need for writing. And consider the length of time between the agreement and consummation of the agreement (called closing or settlement). You want something binding, signed by both parties, to make sure none of the details are forgotten or changed.

Here's the scene: Your offer has just been written and signed. Can it be presented to the seller soon? Your mind starts churning out alternating dreams and nightmares. You have searched so long for this home, what if your offer is totally unacceptable, and negotiations end in a stalemate? What if another buyer butts in and buys “your” home? Perhaps the seller will think your offer is sent from heaven and will sign without a question. In most cases, however, buyer and seller reach a meeting of the minds after some back-and-forth discussion: Negotiations. The agents involved will be the communications links, a critical role.

During negotiations, always keep in mind that you are determining where you will live, and how much money you will pay. If you have retained a buyer-broker, you are paying (at least in theory) for professional advice. You will make critical decisions and you will live in the outcome.

Details of each transaction are very different. Some negotiations are quite simple; some are impossible. To exhaustively cover real estate negotiating would fill several volumes. This chapter and the next will discuss the most important considerations. During the negotiation stage, your agent's experience and expertise will prove invaluable.

The term “negotiating” has a nasty ring to some people. Your carefully prepared offer is seen as an insult! You obviously want to steal the home. The seller is not prepared to take a penny less than the asking price and you will not pay another dime. And, by the way, he will pay no points for your loan! Feelings seem to be overpowering thoughts. A totally adversarial yelling and screaming match is imminent. Even the agents are getting emotional!

Although the preceding scenario is possible, it rarely happens. Skilled agents focus on the facts and concentrate on resolving differences. Buyers and sellers almost always will settle for what they believe to be fair and reasonable. Negotiation is the process of give and take during which a fair and reasonable set of terms and conditions is defined into an agreement or contract. Your objective is to convince the seller that your position is fair and reasonable. You will have a major advantage if your position is close enough to fair and reasonable in order to seem so. Stretch the credibility of your position too far and negotiations will fracture.

The secret of successfully negotiating the negotiating process is control. To control the negotiation, control yourself. Never let the tone reach a state of emotional strain. To do so will always cost you time and money, and you might also lose the ability to live in the home of your choice. If emotions start to creep in, consider slowing the process by tabling all issues, perhaps to seek additional information, for a few minutes, hours, or even days. Delays are usually best avoided, but make an exception in the case of emotional trauma.

Develop an idea of timing. Always move ahead in discussions whenever possible to avoid losing momentum. Be alert for that rare occasion when it is preferable to delay your response, assuming time is on your side. Delays usually favor the seller: If another buyer appears, the seller will be equally as happy with another's money. But as a buyer, your second-choice home might be a distant second, or worse yet, non-existent.

Be prepared to give a little, it is expected. But give little and give slowly. Try to yield on terms that are of lesser importance to you. When you give you will be able to get something in return, if it's only one step closer to a contract. At each stage, carefully consider whether to compromise or to say “NO.” Develop a workable plan to reach an attainable goal and stick with it. So much for the generalities;onward to gain insight into the process.

The process of making an offer and negotiating an agreement in most metropolitan areas has developed over many years into a well-defined and orderly ritual. The main object has been to develop a process, including the forms and the procedures, to resolve and record pertinent details and avoid problems, while treating all parties fairly. Part of the process is rooted in law, part in custom. Your agent has advised you regarding what is customary, and you should conform unless it is impossible.

Your agent will be your communications link and will also provide a buffer between you and the seller. While your agent might also be your advocate, a buyer-broker, it is also helpful to recall the broad definition of the word broker: One who brings the principal parties in a transaction together, conceptually as well as physically, into a mutually satisfactory agreement. Never forget that it is your responsibility to define and communicate clearly what terms and conditions are satisfactory to you. No one else can handle that role.

If standard contract forms are used in your area for resale home transactions, insist on their use and resist changes in the wording by anyone. If someone maintains that wording changes are needed in a standard contract or if you have unresolved questions, consult an attorney who specializes in real estate. If standard forms are not available, your contract will almost certainly be drawn up by such an attorney.

Your offer will be accompanied by the appropriate disclosures on agency; the property; possible hazards; and goodness knows what else. Your agent will suggest how best to demonstrate your financial capability to buy this home. You will also need to include a check, or other form of payment, for earnest money or the initial deposit. Your agent will suggest an appropriate sum, the exact amount to be agreed between you and the seller since it is an integral part of the contract. This is not only intended to show the seller that you are serious, but it is also an amount of money that you are putting at risk. The risk is not a great one, as most buyers and sellers are sincere and honest. But do not assume that if the contract goes awry your earnest money is all you stand to lose. Oh no, watch out for those “other remedies.” Making an offer is serious business and it is a good idea to review contract provisions dealing with loan application and default at this point. Not to worry, a real estate transaction that ends up in court is rather rare. The seller is also taking a risk: The home will be off the market. If you eventually do not buy the home, other potential buyers are lost while the home is under your contract.

A seller's response to a verbal offer will usually be: Put it in writing and it will be considered. Those who make verbal offers have so little interest in buying a home that they are unwilling to invest a little time in the paperwork. All serious offers are made in writing. Only written offers get serious responses. Do everyone a favor, especially yourself. Put your offer in writing. Your agent will provide a copy of your offer when it is written, and at any time when modifications are made. Your agent also will give you an estimate of your closing costs. Some of these costs will be determined by choices you will make later. Your agent will not disclose details of your offer to anyone except the seller's agent. The important elements of an offer generally include: Financial information on you; details of the offer; and the rationale that forms the basis of your offer. You will fully develop your rationale in the next chapter.

When your offer is made by email, fax, or telephone, it is not reasonable to expect the other agent to remember your rationale and repeat it verbatim to the seller. Use of a cover-letter or summary is strongly recommended. A most effective tool is to give the other agent a separate written summary of the reasoning behind your offer and introducing you. This not only makes his job easy but also provides a written, dated record of your official position. The other agent does not want to risk this document surfacing later in the negotiation as a surprise to the seller, so it very likely will be transmitted in an accurate and timely fashion. Important: If executable papers leave your agent's control, an offer expiration date must be included.

The seller will carefully consider the entire offer. He and his agent might discuss the following concerns:

Many sellers will be hesitant to accept an offer that is contingent upon sale of your current home. When homes are selling slowly, it is likely that a customary 30 or 60 day contingency period will expire before your home is sold. As a rule, the seller's home effectively will be off the market during this time because its MLS status is downgraded. Showings will drop off precipitously because the great majority of potential buyers come as a result of the MLS. In an active market, sellers have no need to even consider a contingent offer. In any event, most sellers require the price on a contingent contract to be higher than they might otherwise accept. This is due to the risk they take with their home off the market, paying the mortgage, and missing other potential buyers while waiting in uncertainty for you to sell your home. If you do enter a contingent contract, make sure that your home is priced to sell quickly.
The seller will probably respond to your offer by:

After appropriate discussion, the seller will select an option, almost always immediately, and your agent will convey their response in writing.

If the seller accepts your offer, he will sign and initial in the appropriate places. You will receive a copy of the signed contract along with congratulations. Thank your lucky stars.

If the seller rejects your offer, be certain to obtain some written notification of this from the seller. For example, he can write “REJECTED” across the face of the contract, and initial the notation. Verbal or written notice from an agent is not enough. Don't cut corners here unless you're looking for big trouble. Often no information will be given for a rejection other than that the offer did not form a basis for discussion. You have struck a nerve. Rejecting an offer is rarely the best course of action for anyone, since it can end negotiations. Will the seller consider another offer? Unless the home has been sold to another buyer, you should give it another try, using what you have just learned. If your offer is rejected, it is imperative that you obtain the written notification described above in order to be certain that the transaction has been closed.

If the seller makes a counteroffer, he is implicitly rejecting your offer. The counteroffer becomes the only offer on the table. Notice that when one makes a counteroffer, control is returned to the other party. It is then their decision whether to accept, reject, or counteroffer, and when. One should counteroffer only if the changes being proposed are truly of major significance.

A counteroffer will be made in writing. In most jurisdictions changes will be made directly on the original offer along with one's initials and space for the other party's initials, which will signify approval. Always ask the agents to avoid telephone negotiations unless the change involves only one item and is relatively insignificant. Be especially reluctant to negotiate verbally with a distant seller. Although it will be easier and faster to proceed verbally, you will have no assurance that the actual seller or decision maker has heard your entire offer and has made a complete and clear response. Demand that any counteroffer be signed, initialed, and official before you respond. FAX and electronic signatures are legally binding, but original signatures might be obtained after complete agreement.

It is best to avoid rewriting the contract. Yes, it probably will become cluttered, but be concerned only with clarity and legibility. Rewriting the contract for the sake of neatness can cost you dearly. But as always, ask your agent what is customary and try to conform.

You will know you are in trouble if the seller receives multiple offers. This puts the seller in an excellent negotiating position. Perhaps your agent can verify existence of the other offer by calling the listing broker's office and inquiring whether any offers have been “registered” on the subject property. Your agent should also ask the name of the real estate firm and the agent who has registered the offer. You should then be afforded time, before the presentation of your offer to the seller, to modify the offer you prepared while thinking that you were the only prospective purchaser.

You are not obligated to sweeten your offer but serious consideration is in order. Each selling agent hopes that his purchaser's offer will be accepted. You will need an edge. The effort you spent in choosing a good communicator and negotiator will be rewarded in the event of multiple offers.

When you reach an agreement, your negotiation is finished. Go ahead, celebrate: You have a contract. (While this is an important milestone for buyers and sellers, experienced agents have learned to postpone their celebration until after closing.) Keep in mind that contract provisions can be altered with the agreement of all parties. So if you need a minor change later, feel free to ask.

In all stages of the negotiation, maintain a reasonable or at least a defensible position. Project your sincerity, friendliness, and understanding. Avoid emotion and stay in control. These overall guidelines along with good information and a firm mind set will lead to your most favorable contract.

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CHAPTER 9
NEGOTIATING THE CONTRACT
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By the time you finish this chapter, you will think you know it all. Still, it is impossible to anticipate the exact combination of information and decisions that you will have to address in your negotiation. Therefore, reading a book is no substitute for years of experience. In other words: Use your buyer-broker. The same information you developed to prepare your initial offer will be useful in mapping out a strategy for the negotiations, assuming you are not operating in a hot sellers' market.

You will need to answer the following questions in light of the other pertinent details of your offer such as the closing date and concessions you are requesting:

At this point, the difference between an agent who is the agent of the seller versus a buyer-broker needs to be clearly in focus. If you have opted to retain a buyer-broker, he can be a full participant in the strategic planning, and will volunteer information and considerations that you might have overlooked. You can feel free to discuss your pricing ideas.

If your agent is not your buyer-broker, you will have to plan the negotiation on your own. Such an agent should be willing to develop any information you request, but making comments, suggestions, or interpreting the raw data is not in his job description. In fact, this would be a breach of his duty to the seller. You must not discuss any details of your negotiating strategy with your agent if he is not your buyer-broker. For an agent of the seller to know your plan will do you no good, might do you some harm, but worst of all can introduce doubts into channels of communication that need to be clear. Most agents who are acting as an agent of the seller will not want to have access to details of your plan.

It is time to write your offer. You will have many questions and perhaps a hint of an anxious feeling. “How long has this home been on the market,” you ask. Hopefully this information is just a few keystrokes away via a computerized MLS database. If a home has been on the market too long it might indicate that the seller is weary, or to the contrary, does not have a strong desire to sell. File this question in your memory, the answer will appear in due course.

Another very important question is, “How long has the home been marketed at this price?” If there has been a significant reduction recently, this could indicate that the seller is getting desperate, or possibly just reasonable. On the other hand, the seller might be very hesitant to give another large concession so soon. If the home has had a significant reduction and this has brought the price into an attractive range, do not hesitate: Offer now and do not let negotiations become protracted. But if the home has been on the market for too long at the current price, it is overpriced, by at least 5%. Ask your agent about current days-on-the-market statistics to determine how long is too long.

Reflect on the months supply figures you calculated for this home during your decision process in Chapter 6. This time, compare the number with a recent calculation for the market in general, which can be generated as described in APPENDIX F. This comparison will indicate your negotiating strength relative to the seller, all within the context of the current market.

Refer to APPENDIX D and calculate an average selling price to asking price ratio for the area or subdivision you are considering. How much have other buyers been negotiating off the asking prices of nearby homes? Note that in a hot sellers' market, many buyers will be paying the asking price or greater. Are there any sales that were exceptionally high or low? Can you find out why?

What month is it? In June or July there are a peak number of homes on the market: Buyers have the best selection of homes; sellers have the most competition to fight. Will these facts worry your seller into accepting your offer? Yes, but only if you make your case convincingly. Use APPENDIX G.

Review APPENDIX H. If you are buying in March or April, the peak selling months, plan to conduct your negotiations without delay. In April you will be able to point out to the seller that it (the number of home sales) is all downhill from here. Remember that most sellers believe the peak selling months are May to July. Dispel this myth to your advantage, by providing this valuable information to the seller. If it is November or December, don't you have a responsibility to advise the poor seller how few buyers are in the market?

Don't be shy: This is an adversarial proceeding. Even in a win/win situation, don't you want to win more? View each piece of information in two ways. First, what does it indicate about this transaction in the context of the market? Second, how can this information be used to support your position? You will be amazed at the results you can achieve through your effective use of available information. If you happen to uncover some information that supports the seller's objectives, it is his responsibility to point it out, not yours.

Some buyers will even stoop so low as to review the tax records and use this information if it suits their purpose. As you found in APPENDIX C tax assessments have no consistent relationship to market values. But most sellers and many agents do not know this. There is also a good deal of confusion between assessment and appraisal that is due, no doubt, to the fact that they both begin with the letter “A.” The tax assessment argument is used more often and more successfully than one would suspect. It is a graphic demonstration of the assumed legitimacy of the printed word (printed number in this case). Indeed, the printed word needs to be challenged a bit more often (the publication in your hands excepted, if you please).

While you are reviewing the tax records, please understand the fact that the sellers paid $8,600 for the home in the year 1931 is quite irrelevant. You might, however, find information about present loans on the home. A seller who owes an amount close to the asking price might have very little cash as well, and consequently will not be able to accept a low offer, even to escape foreclosure. On the other hand, if the seller has a good deal of equity in the home, he has the capability to sell for a lower price. All you need is to gain his willingness.

Review the information you have developed in order to set your goals. Go through it again to determine what bits of information will best support your case. Then assemble a phased plan. Do not use all your information in the first encounter. Decide where each bit fits. Presentation of your first offer should be simply an information gathering mission. Merely give any justification you can for your (rotten?) offer and not much more. Save the big guns, the suggestion that you are about to pursue another course of action (i.e. another home), for the last round. This is the seller's ultimate worry, and indeed it should be.

In a buyers' market, your initial offer defines the minimum outcome of negotiations; the asking price defines the maximum. The final outcome obviously will be somewhere in between the two. Your overall objective is to convince the seller to see things your way and agree on a price very near what you are offering. Include a request in your original offer for the seller to give a closing cost credit equal to the maximum allowed by your lender. You will have already determined this limit. There often is a space in the contract form that invites such a concession, and the seller needs to see how this is used, even if you subsequently concede this amount.

If you are worried about the remaining life of the home's appliances and major systems, you might add a request that the seller buy a “One Year Warranty” to protect you. These insurance policies are widely available for less than $400. Alternatively, you might buy the warranty yourself with your negotiated savings. The policy's cost is a minor item in the context of most negotiations, but the seller will only give so much. Loading the offer with minor requests will seriously damage your ability to negotiate the best price. You will need the seller to focus on the facts that lead him to a lower price, so stay focused yourself.

The most common buyer mistake is to offer too low a price initially. If the seller really is desperate, the asking price already reflects that fact. Perhaps that is why this home seemed such a good value to you. Further large reductions might take so long to negotiate that another buyer will appear and end up with “your” home. Insulting the seller with a price that is too low will not help your position. Remember, in all your direct and indirect contacts with the seller so far, you have been open and friendly (but not informative). Hopefully, you have impressed the seller as a friendly and reasonable person. Maintain this impression to achieve your goal. Sellers, after all, are human too, and they are more likely to accommodate (price-wise) someone they like rather than someone whom they perceive as ignorant and aggravating. So where does one draw the line? In general, you can ask for the lowest price that you can support with a rationale. In addition, ask for whatever concessions, seller credits, for example, that fall within the envelope of acceptability. If you plan and execute this phase properly, you will avoid eliciting an emotional response and will be on your way to a favorable agreement.

Negotiating is not about being nasty. It is not about being stubborn. It is about communication, compromise, and doing the best with the information you have generated. Just like you, the seller has veto-power over any proposal. If you consider your position to be absolutely right and unquestionable, you're headed for trouble. You and your agent will take utmost care to be friendly, to be serious, and to appear reasonable by supporting your position with carefully prepared information. Your agent's sense of timing that comes from experience will be invaluable. Just as important as knowing what to say, is knowing what not to say. Before responding to any proposition, ask yourself whether a response is needed, whether it will support your position, and whether this is the best time to make the response.

It is usually counter-productive to list, either in your offer or verbally, all the things you do not like about the home and that you are planning to change immediately. After all, the sellers put their hearts into selecting those things you are going to trash. How insulting! Further, you are admitting overtly that they have not yet negotiated you out of your last penny. Therefore they will negotiate even harder.

The seller probably will have some idea of what type of buyer you are. If not, some general information on the subject might be enlightening. A few examples:

Whatever type of buyer you are, be sure to use it to promote some uncertainty in the seller's mind.

You will know you are in big trouble if a host of new considerations crop up during the negotiation of an offer. A very few of the many examples, all designed to implore you to accept the current counteroffer, are the following:

You might hear most of these things as well as others. But panic only if your agent picks up the theme and amplifies it. This is not the time to make your important decision based on brand new, alarming, unverified, incorrect, or irrelevant information. The preceding scenario is less likely to happen if you have painstakingly selected your agent. If you have, then listen carefully to your agent's advice and sort out the points that seem reasonable and important. Use your agent's experience and do not automatically assume that you are hearing an ill-founded, self-serving, high-pressure sales pitch.

If you do recognize that you have a major problem and it seems as if you are the only one on your side, it is too late to fix. Make a final counteroffer, give your reasoning, stand your ground, and don't back down. It will work if the seller is convinced of either your rationale or your firmness. If you are lucky, you will emerge with an average result.

Some counteroffers are ridiculous indeed, designed to shock you into modifying your expectations. It is no time to be insulted and scuttle the proceedings. An emotional response is your biggest enemy; it will always turn down-to-earth issues and quantitative differences into an ill-defined mishmash that will be impossible to deal with. Although this counteroffer might make you mad enough to expectorate, use your good judgment to formulate a response. If a counteroffer is not acceptable, you must reject it or counteroffer. Review the information at your disposal, make your decision, and give your rationale.

Remind yourself that your position is justifiable. You are on firm ground. You have an unbeatable team, you have done your homework and you have much more ammunition (information) than the seller. Your ultimate weapon is to buy a different home. If you use it, you have lost your first choice home. So do whatever you can to avoid the ultimate confrontation. Approach the problem carefully and logically. What information formed the basis for the seller's counteroffer? What information is he lacking? How can you impart the understanding required to bring the seller's view into line with yours? Can you offer information on comparable sales, order an appraisal, or perhaps ask your agent to do a market value analysis? Convince the listing agent and you are at least halfway there. By the way, the listing agent really wants your offer to work or else he will be back on the market writing ads and holding open houses instead of setting up your termite inspection and deciding where to deposit his commission.

It is no surprise that price is usually the most difficult factor to negotiate. The seller probably will focus major attention on his bottom line, the net cash proceeds at closing. It is always far more important than the actual contract price itself. Of course the price has a direct bearing on the bottom line, but so do any points and credits that you are asking him to pay for your loan or closing costs. And do not ignore his extra carrying cost if you are requesting that closing occur much later. If you can, move the closing date to accommodate the seller. If you need to give, offer to pay your own mortgage points. Some sellers have a philosophical objection to paying your loan costs. Remember that points are fully deductible on your income tax returns in the year they are paid.

Be alert to the occasional seller who is overly concerned with his top line, the price itself. If you hear that the seller is stuck on some price or fears for home values in the neighborhood, you might be dealing with an emotional issue. Offer $10,000 more and ask for a $10,000 credit for closing costs at settlement. You have given nothing but a number. Check with your lender to be sure you do not exceed the limits on seller credits.

Although the preceding ideas will be invaluable if you are buying a resale home, some of them might not be useful if you are buying a new home. In this event, you are dealing with a professional home seller in a unique market environment. The builder knows where the market is and where his products fit into the price spectrum. Otherwise, he would be out of business.

New home prices will be less negotiable than resale prices. Sometimes they will not be negotiable at all. But sometimes a builder will include extras at little or no additional cost. A builder can add a $10,000 deck during construction of your home for much less than $10,000. Many builders will help with closing costs by giving a credit, paying points, or both. Sometimes the site agent will volunteer valuable information on potential concessions. New homes contract forms are not standardized in most areas and should be read carefully by both you and your agent.

When you are ready to make an offer, have your agent call the site agent and ask if the builder is considering offers. If the site agent has any chance of making an offer work, you will be encouraged. His job is to bring offers, not to worry about profitability. That is someone else's job. If the site agent tells you that the list and option prices are firm, he is risking your business. But you can expect an accurate answer in any case. He should know best how his builder will react to a proposal. There is no future in spending an hour or two preparing an offer that surely will be countered with the list price, so have your agent call first.

It is especially important with new homes that your earnest money deposit is held by the real estate firm, or by the designated closing agent. Real estate broker and closing agent escrow accounts are subject to strict governmental controls in most states. In the event your builder has unforeseen financial difficulties (i.e. bankruptcy) between contract and closing, your funds will be safe. Buying a home that is not yet built requires a degree of faith and trust over and above that required for an existing home. It is important to begin the process with a comfortable feeling.

In general is best to avoid time limits, which can weaken your position and add needless aggravation to the negotiation. But nowadays an executable copy of your offer will likely be emailed, faxed, or otherwise entrusted to the other agent (in person presentations by your agent are extinct) and there might be lazy, inconsiderate, or ignorant agents out there who shirk their responsibility to provide closure; that is, a written rejection. Without this, you must write a letter of withdrawal in order to kill your offer. So add an expiration date even though local contract forms do not provide for one. Your agent can communicate that it is not intended to apply pressure. If your offer does expire, it is easy for the seller to delete your expiration note, initial the change, and return it for your concurrence.

You might reach a point where the seller says, “Let's split the difference.” If this is satisfactory, then accept it. You have reached an agreement, and now you can celebrate. But there is no intrinsic rationale to support this approach and you should feel no obligation to give an automatic “YES.” For example, imagine that you are offering $200,000, and a counteroffer is made at $300,000. Would you split the difference and buy for $250,000 knowing a fair market price is $220,000? Of course not. If splitting the difference is not acceptable, reply that you simply cannot afford to split the difference and therefore you are making a counteroffer.

The idea of face-to-face negotiations between you and the seller might surface. Sounds reasonable enough, two adults sitting down and coming to a mutual agreement directly. While this surely has been done, it is advisable only as a last resort. The danger of a fatal injury to the talks is so great that it is better to break off negotiations leaving a chance that they might reopen later. If there are four adults at the negotiating table instead of two, the chance of total failure rises exponentially. One of the most valuable services that your agent provides is insulating you from direct negotiations with the seller. This is crucial in avoiding snap decisions made before complete and careful consideration of all options and implications. You might have noticed that important negotiations, business or diplomatic, are never conducted directly by the principals or the ultimate decision makers. There are good reasons for this, so take the hint.

If you say this is absolutely your last offer, be prepared to mean it. Do not bluff by making a take-it-or-leave-it counteroffer. This can end discussions in a hurry. If you did not really mean it, the seller will have learned that you do not mean what you say. The credibility you have built will be reduced to rubble. If the seller gives you his last offer, take it providing it is satisfactory. Otherwise consider rejecting it without a counteroffer and without comment. In doing so, you are conveying that you believe what he said. The subtle message is that you mean what you say too. But recognize that most final offers really are not final offers.

Your alternative to making a take-it-or-leave-it final offer is to make your last offer without any mention of finality. If it is not accepted, re-submit your offer with no changes. Be calm, reasonable, brief, and almost apologetic. You will make your case in a strong but non-threatening manner. This works.

If negotiations do break down at any point, it might not really be the end. Before you walk out, have a plan by which you can walk back in. You will not run back in immediately. Let some time elapse. The hardest thing to change is a mind (unless, of course it is your own). It always takes time. How much time it takes is a matter of judgment. If you return too soon, you will have gained no mind adjustment from the seller and will have lost some of your credibility. If you wait too long the seller will find another buyer. If the seller was the one who broke off talks, do not be too proud to initiate resumption of negotiations. The listing agent can be a major help. Ask for his advice.

Before you make your offer, you will need to know the current market situation. You might have noticed that the main thrust so far, has been directed toward obtaining the lowest possible price. This is indeed important as well as attainable in a buyers' market, or often in a transitional market. But in a hot sellers' market, you can disregard much of the chapter before this point. To spend time planning and negotiating in a sellers' market often can lead to “your” home being sold to another buyer. This situation is heralded by a call from your agent saying, “I have just learned that there are other offers on your first-choice home.”
If you wondered whether your agent's experience and communication skills were important (please refer to Chapter 3) you will soon learn the answer. There will be no time to sit and plan, critical decisions will be made in a flash and will be communicated by cell phone. Experience and presence of mind will dictate the outcome, which will be related more closely to your agent's skill than to any other factor. See APPENDIX J for some hot-market buyer tricks.

NOTE: The text of David Rathgeber's “BEFORE YOU OVERPAY on a HOME” which appeared in the September 11, 1998 issue of the “Home Guide” (published by The WASHINGTON TIMES) appears in APPENDIX K.

As you proceed, you will find that all of the negotiating information in this book is merely the tip of the iceberg. Do not lose hope. In fact, if you use the information in your arsenal, the chances of negotiating an excellent agreement are very good. In general, if your seller accepts a price lower than 90% of the asking price he probably has made at least one big mistake, either in pricing or in negotiating; and you have done very well. You can be happy even if you beat the local average by only a percent or two.

But not so fast! Just as you are ready to put your final initials on a binding contract, consider this: Some buyers express remorse following conclusion of a negotiation. This is not only unfortunate, but also unnecessary. So, when negotiations are nearing an agreement, hopefully at the last stage, play this imagination game. Carefully consider the terms and conditions to which you are about to agree. Remember that a contract is binding and that its details can be changed only with the agreement of all parties. Then imagine that the proposal on the table has been finalized, that you have had a good night's rest and that it is now tomorrow morning. Do you have reservations about the agreement? Could you have done better? Tomorrow morning will be too late to make changes. Are you sure that you want this proposal to become a binding contract now? Of course, you can “sleep on it.” But there will be no additional information available in the morning, and a delay can serve only as an opportunity for the seller to reconsider too, or for another buyer to appear on the scene. If the proposal is acceptable, sign it now and be happy, both tonight and in the morning.

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CHAPTER 10
ON TO CLOSING
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The time between signing of the contract and closing is normally 30 to 60 days. Processing your loan could take 10 to 30 days. Until you actually close on the home, you may have a nagging feeling that there is something you should be doing regarding the transaction. Usually there is not, but better to ask than to wonder. Pay special attention to any date in your contract by which you must notify the seller of your loan progress.

There is one thought that almost certainly will occur within a day after contract finalization: Could you have gotten an even lower price? The answer: Maybe you could have gotten an extra thousand dollars or even two off the price; but maybe you could have lost the home to another buyer. You made your best decisions at the time and it is done. You deserve to be happy.

If you are a first-time home buyer, the enormity of the transaction will sink in at this point. It will help to recall that others have done the same thing and have lived to tell about it. Also, much of the money involved is not being spent or used up; your assets merely are being reallocated.

There are a few things that will need attention. If you have purchased a condominium or a home that is covered by a property owners' association, in most states, the required disclosures will need your review. Is the organization financially healthy? Review current income and expenditures, planned expenses, cash reserves, and whether any special assessments or lawsuits are impending. With condominiums, your lender will be concerned with the owner-to-occupant ratio. In other words: Are too many units rented? You probably do not care but your lender might.

Many buyers will have the home professionally inspected. This is highly recommended. Select a full-time inspector who will issue a written report on the spot. Ask whether the inspector is a member of the American Society of Home Inspectors (ASHI) or the National Association of Home Inspectors (NAHI). Their web sites at ashi.org and nahi.org have member directories and more information. You should attend the inspection if at all possible. You can ask questions, alleviate concerns, and probably learn some interesting things about the home. Most of the time the inspector will not find any surprising major deficiencies.

Rarely, problems will include contamination from asbestos; urea-formaldehyde-foam-insulation (UFFI) vapors; and lead, either in paint or in drinking water. Possible deterioration of certain types of plastic water supply lines is an issue in some locations. Townhomes might need replacement of any defective fire retardant treated (FRT) plywood sheathing found in their roof. In some areas, concerns about earthquakes, mudslides, or flooding might need to be addressed.

Make a clear distinction between deficiencies that need immediate attention as opposed to routine maintenance suggestions or the home inspector's opinions regarding the remaining life of various systems or equipment (offered merely for your information). The inspector's report should contain a summary of items that need attention. Proceed according to local custom. Often you will make a written request that the seller attend to these items before closing. A copy of the inspection report should accompany your request. In areas where the home inspection precedes the contract, the request for repairs is included as part of the subsequent contract.

If the seller believes one of the inspector's findings is out of order, he should support his case with reasons and, if possible, receipts showing when the problem was resolved. Feel free to telephone the home inspector for advice or clarification. Be understanding and accept any seller explanation that is reasonable. View home inspection issues as money issues, rather than as a test of negotiating skill. Hopefully you have already earned your negotiating merit badge. In conjunction with the home inspection, review any contract language dealing with what is customarily required of sellers regarding systems, appliances, et cetera, even in the absence of any home inspection.

In some areas of the country you will be concerned with radon, a colorless odorless radioactive gas that can accumulate in homes and cause lung cancer. If you obtain a radon test result greater than 4.0 picoCuries per liter, the accepted maximum, some action will be required. It is true that the test measures conditions during only a short time. The result might be a mere 4.1 picoCuries per liter, and the seller might question, “How accurate are these tests anyway?” Do not grant a re-test even at the seller's expense. Read the provisions of your radon test addendum. Problems can be remedied for less money than a few re-tests. In almost all jurisdictions, once a failing result is on record, it must be disclosed to future prospective purchasers. Almost every purchaser would demand remediation at the seller's expense. Here again, you will provide the seller with a copy of the report. While excessive radon can be a serious health issue, it does not have a major effect on real estate transactions.

In negotiating home inspection deficiencies or radon remediation, always make your requests in writing within the required time limits. Require the seller to respond in writing. Only in this manner will he decide that he really does not want to say “NO,” as this would give you an option to cancel the contract. So do not respond to a verbal “trial balloon” other than to ask the seller to put it in writing.

The property will have to be visibly free of wood-destroying insects (such as termites) and the damage therefrom in any area where these pests reside. The seller also should be required to deliver the property with the well and septic systems in good order. Check on any special requirements for septic system approval in a vacant property.
If you have not designated a closing agent in the contract, select one at this point. You should ask the closing agent whether closing could be scheduled on the agreed date and about the following costs:

Also, ask that your owner's title insurance policy include an inflation rider that provides coverage to at least 150% of the contract price. Some title insurers have been quietly eliminating this once-standard coverage, but it is widely available free of charge if you ask.

In some areas everyone and his brother attends closing and brings his own attorney. In other areas, even the closing agent might not be an attorney. In these instances, the closing agent represents neither you nor the seller, and most buyers and sellers do not retain an attorney to represent their interests. Determine what format is customary in your area and go with the flow.

A title search will be done at your expense to establish the seller's clear title or ownership of the property. Minor problems might be uncovered during a title search. Most such problems can be resolved easily, so do not be upset. But if a disgruntled contractor has filed a lien against the home, it is now judgment day for the seller.

The closing agent will coordinate progress with your lender. It is a good idea for you to double-check the status of your loan with your lender from time to time. At some point a survey of the property will be done. You will pay for this and receive a copy at closing. Condominiums will not require a survey because there is no land involved. If you cannot be present at closing, you will need to designate someone to act for you. Power-of-attorney forms should be available through your lender or the closing agent.

Your lender will send an appraiser to the home to render an opinion of its fair market value. If you have used the ideas in this book, the appraisal surely will indicate a value equal to or greater than the contract price. Do not be alarmed if the appraiser indicates the value is only equal to the contract price. Appraising property is not an exact science and if the appraiser has justified the contract price, you should be content.

If the final appraisal sets the home's value below the price on your contract, price negotiations with the seller will probably reopen. (Refer to your contract for specific guidance.) Often it will be the seller's move first, to reduce the price to the appraisal amount. You are in a strong position because your seller knows that if you cancel this contract, the same appraisal problem probably will occur next time. If during previous negotiations a reference was made to your second-choice home, a reminder for the listing agent and seller might be in order. On the other hand, remember that you probably do not want to start the home search process anew.

At some point you will have to make a commitment to your movers. If you have not obtained loan approval by this time, at least get a progress report and some assurance that a timely approval is likely. Take a deep breath, exhale, and set your moving date. Even getting out of bed in the morning involves a degree of risk. Ever wonder whether there also are risks associated with staying in bed?

Your lender will require you to have proof of a one year prepaid fire insurance policy on the home before closing. A typical homeowner's policy will fill the bill. Your lender will want to know the monthly cost if he will be collecting a monthly amount for an insurance escrow account. If you are buying a condominium, the condominium association probably fulfills the fire insurance requirement.

As closing approaches, transfer of the utilities should be coordinated with the seller. Electric, gas, water, sewer, telephone, refuse collection, cable TV, et cetera; can be handled within a few days. Coordination of utilities between seller and purchaser can help avoid unnecessary extra charges as well as major damage that could occur during freezing weather with no heat. Also important, continuity of the utilities will help ensure a meaningful final inspection: It is hard to check the appliances when electric power has been shut off.

Be sure to file a forwarding order with the Post Office at your old location. This will ensure that mail will be re-routed with a minimum of delay. At some point you will also want to notify all who customarily send you mail. Do not forget to tell those selected friends and family members who you will want to find you in your new location.

Call the closing agent a few days before closing and ask how much money you will need in certified funds or in a cashier's check. The check is often made to the order of the closing agent. They might not have an exact number but press them for an approximation. If your funds are elsewhere, for example in a money market or mutual fund, remember to transfer the funds to your local bank in time for them to “clear.” You cannot go to your local bank, deposit your money market check, and walk out with a cashier's check all in the same day.

In most areas a final inspection, or walk-through, will be done shortly before closing. It is usually uneventful, but if a problem is detected, you can ask that part of the seller's proceeds be set aside with the closing agent in an escrow account until the problem can be resolved. Reasonableness should rule. Refer to contract provisions if necessary.

A typical closing can take less than an hour or several hours, depending on the format and the number of outstanding issues to be negotiated. Your lender will send a thick package of papers for you to sign. Any questions are normally directed to the closing agent. The HUD-1 form is used universally in the United States to account for financial details of the transaction. It is usually the first form to be explained. Look it over carefully for errors or omissions compared with the contract provisions.

Most lenders will collect an amount, included in each monthly payment, for fire insurance as well as for real estate taxes. When the bills come due, your lender will pay them from your escrow account where the funds have been accumulating. If this is the case, the HUD-1 form will show initial amounts you are paying into this escrow account. The HUD-1 form probably will show charges to you for deed and mortgage recording fees, land survey cost, and an up front mortgage insurance premium (MIP or PMI) if applicable. Most or all of the charges will have been the subject of estimates given to you much earlier by both your real estate agent and your mortgage loan officer, so try not to look too surprised. But if you do have a question, be sure to ask before you sign.

Most of the signing is associated with the new loan and will be done by you. All mortgage companies seem to have major investments in paper mills. There is a form for everything, even a form to check whether all the forms have been completed. Although the seller might be receiving tens or even hundreds of thousands of dollars from this transaction, the actual closing ceremony can be boring for him. To ensure a more memorable occasion, he might complain at length about the $5 charge for notary fees. Just keep signing.

The closing agent will explain any forms you ask about. While many of them are standard, it is nevertheless important to at least understand the major provisions. At some point when you are busy signing away, you will get the thought that you are taking quite a lot on faith. It is an imperfect process in that respect, but it works very smoothly. Almost no one takes the time to read and understand every single clause. It might help you to know that if you tried to negotiate the provisions with your lender, you would promptly be told to find another lender. Indeed many of the requirements are dictated by demands of the “secondary mortgage market,” over which your lender has as little control as you do. Of course you will check carefully to ensure that the interest rate, loan amount, monthly payment, and other important terms of the loan are the same as originally agreed at loan application or lock-in time.

An important decision will be whether you want to purchase owner's title insurance to complement the lender's title insurance that your lender will certainly require. Title insurance involves a one-time cost. It protects your right of ownership to the property. Almost all buyers purchase full coverage, called an owner's policy. Your closing agent will provide additional information if you are buying an owner's policy. Be sure that inflation coverage, as discussed earlier, is included.

You will receive a copy of everything including the mortgage papers and the deed, the piece of paper that is used to transfer ownership to you. Instructions will be provided on the exact amount of your mortgage payment and where it should be sent. Near the end of the closing ceremony you will receive any keys, garage door openers, instruction manuals, et cetera, if they have not been left in a designated kitchen drawer. And don't forget to hand over that big check!

After closing, the property deed and the mortgage or deed of trust will be recorded in the local government records. This makes the transfer official and your copy of the deed will then be nothing more than a memorandum. In several weeks, you should receive your title insurance policy. This is an important document; be sure you receive it; check for the inflation rider; and keep it in a safe place. This document should be retained indefinitely, even after you sell the property some day.

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CHAPTER 11
PUTTING IT ALL TOGETHER
*******************************

We hope you have reached this point in your reading before significant decisions have been made in your home buying process. If you use the information available, you will have an excellent chance of buying the right home for the minimum price with a minimum of stress and strain. The home buying process is rather complicated, due in part to the significant changes in real estate which have occurred in the last few years, and because most of us buy homes rather infrequently. Yet the process is important. This final chapter will review the essential ideas.

Chapter 1 deals with the major preliminary considerations associated with a decision to buy a home. Some of the unique benefits of home ownership that affect both you and the real estate market are noted. Various types of buyers are identified, and their individual needs and characteristics are discussed.

Chapter 2 offers the central idea that our local real estate market is orderly and rational, driven by the information exchange capabilities of the computerized MLS database. Today's sellers are sophisticated, well-informed, and want top dollar for their homes, sometimes more. But they, just like buyers, find themselves constrained by the very real concept of “fair market value.”

Chapter 2 also suggests that buying a home without the help of an agent probably is not a suitable alternative. Nevertheless, if you are the adventurous sort who would set out on a trans-Atlantic voyage without a compass or a captain, you might give it a try. But a complete and efficient home search can only be conducted with a real estate agent. Select the right agent to be your buyer-broker (if this conforms to local custom) and you will be very happy with the result.

Chapter 3 is critical. Its specific questions will separate your agent from the rest, and your entire home buying process will be assured of success. The idea of home buyers interviewing agents and making a conscious choice is not widely accepted yet. Use of the procedure will increase as the buyer-brokerage concept matures.

By following the selection procedure carefully you will verify that your agent is in tune with critical market information, takes time to care about the quality of service provided, and understands how those considerations directly relate to your goal. Emphasis is appropriately placed on negotiating expertise, which is a critical skill.

Chapter 4 furnishes critical information on how to pay for your home. The funds required probably will come from two sources: Your own funds for a down payment, and a loan for the balance of the purchase price. Each of these sources is examined separately with the objective of determining the upper limit of your home buying power. Various topics are discussed including fixed interest rate loans, adjustable rate loans, and other important questions that will help you select the best loan from the vast number of options. Reasons are offered why once popular “creative financing” is now rather rare.

Chapter 5 details the planning and design of your efficient home search. Mandatory and optional MLS search criteria are given along with the information you need to choose a home with a minimum of effort and also give consideration to every one of the thousands of homes for sale in our area. An efficient method of identifying possibly distressed properties is proposed.

Chapter 6 reveals what to expect during the actual search for your home. On the road you will not only be collecting the information you will need to make your final choice but you also will be building your personal wealth of market knowledge to ensure that your choice is economically sound and market wise. This chapter also offers views on what you might encounter as well as an idea of what to ask and discuss, and with whom, in order to build a foundation for the impending home selection and negotiation phases. The danger of expecting to find your one “perfect home” is exposed.

Chapter 7 identifies the best sources of information you will need to make your home choice. The selection process is examined with the goal of determining which home is the best one for you in the context of today's market and economic considerations. Special thoughts on brand new homes as well as on townhomes and condominiums are offered. The “dilemma” of ending with two home choices is resolved.

Chapter 8 sets out the fundamental principles involved in the critical contract negotiation process. The importance of process control is explained. Emotions are identified as the destroyer of productive negotiations. Credibility, firmness, and sincerity will lead to your most favorable result. The pitfalls of verbal negotiations are highlighted and special consideration is given to the key negotiating technique to use with sellers who are banks or relocation companies, as well as sellers who are elsewhere.

Chapter 9 contains a few of the most important negotiating tactics you might use as well as some you should avoid. You are also counseled to be alert for tactics that might be used against you. Emphasis is placed on using your agent (hopefully your buyer-broker) and the information at hand to accomplish your goal. Use of the specific information available in tax records and the MLS database is treated. Seasonal supply and demand variations and your specific buying situation can also be used to your advantage.

A general plan is advanced that will enable you to determine a fair price for the home and what to offer initially. Your ultimate threat is identified along with ideas to help keep you from using it. Timing of negotiations is discussed in order to spare you the ultimate embarrassment of having someone else buy “your” home during the process. If you are buying a new home, some special considerations are noted to keep you out of big trouble and get you the best price.

Chapter 10 provides the information you need to cruise from contract to closing with a minimum of problems. Home, radon, and other inspections, as well as appraisals and title insurance are detailed. Knowing what to expect in advance will smooth any potential turbulence during this sometimes anxious period.

A few examples were given of instances when your agent's personal quest to make a sale might be in conflict with your own financial interests. While you need to be alert to these possibilities, you will obviate potential problems by choosing your agent carefully. In a buyer-broker mode of operation your agent's responsibilities, as well as adherence to a code of ethics, demand that your best interests must be served above all and at all times. In any event, you will be confidently in control of the home buying process at every stage.

But what about the future? It looks bright as long as at least 9 out of 10 people keep telling you they prefer to own their own home. While you are doing a little market research, consider the underlying factors that drive the market. Demographics, the long term changes in population distribution (age groups, geographic location, etc.) are not likely to rank among the more important factors, because these changes occur over such a long time. In addition, they are not subject to two significant influences: Governmental controls and public opinion.

Consider the interrelationship between interest rates, home prices, rents, and personal income, or purchasing power. When one of these factors experiences a significant change, one or more of the other factors will also be affected. Mortgage interest rates can make significant moves in a short time. Personal income depends upon employment as well as wage and salary levels and therefore it moves more slowly. But both personal income and interest rates change rather independently of each other and are influenced by macro-economic trends: The big picture. Home prices and rents are caught in the middle as the dependent variables.

For example, if mortgage interest rates move down this means improved affordability for real estate. Even if personal income remains stable, buyers can buy much more for the same monthly payment that they were undertaking previously. This results in upward pressure on home values. But prices sometimes can be held in check by economic worries, periodic interest rate spikes, or a large resale home inventory.

The macro-economic climate is a significant imponderable. Watch the stock market indexes. While they are generally driven by long-term economic conditions and expectations, abrupt movements are almost always the result of emotional “herd instinct” and have no effect on housing markets. Fortunately, residential real estate is insulated from such herd-instinct fluctuations for three important reasons: First, there are many real estate markets (not just a few, like stocks) which are each subject to unique local influences. Second, we could not all sell our homes on the same day (does October 19 ring a bell?) even if we wanted to. Third, our homes are much, much more than investments. They provide a basic need: Shelter. Economic worries can have a negative influence on any local real estate market, but improvements in consumer confidence bring strength.

Keep an eye on changes in interest rates. They can have an important effect on the real estate market, but remember that real estate markets do not move in lock-step with mortgage rates. Further, the housing affordability index is not fixed, but varies greatly with time and location. Note the great differences in home value appreciation in different housing markets across the country despite the fact that mortgage rates are nearly uniform!

Remember to get your real estate advice from real estate folks, not the Wall Street gurus who cannot even tell us about the stock market. And be careful not to make important decisions on a 30 second sound bite. See APPENDIX L and keep the news in perspective. Monitor your local economic conditions and most importantly, housing supply and demand. You now have at your command the practical and proven inside information to buy a home with confidence. Information is power. Use it!

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APPENDICES
*********************

A - To Rent or to Buy?
B - Ten Tips for First-time Buyers
C - Tax Assessments
D - Selling Price / Asking Price
E - Home Selection Check List
F - The Market Index
G - Homes on the Market
H - Homes Sold
J - Hot Market Tricks
K - Don't Overpay on a Home
L - Put the News into Perspective

APPENDIX A
To RENT or to BUY?
***********************************

Results will vary depending upon individual situations, but the example below indicates that someone paying $1,502 in rent can pay a $2,697 mortgage payment at the same net cost. The illustration is aimed at first-time home buyers who might be unfamiliar with the financial benefits of owning. Once you understand the concept, be sure to have your tax accountant or mortgage loan officer perform a similar calculation using assumptions specific to your situation. And remember that the decision whether to buy a home or rent depends on much more than financial considerations.

ASSUMPTIONS

APrice of home $500,000
BDown payment (20%) $100,000
CMortgage amount $400,000
DMonthly payment (E+F+G+H) $2,697
 EPrincipal$480 
 FInterest (at 5%)$1,667 
 GTax (real estate)$500 
 HInsurance (homeowners)$50 
JIncome tax deductions (F+G)$2,167
KYour income tax bracket (L+M)33%
 L  Federal (marginal)28% 
 M  State and local (marginal)5% 

RESULTING BENEFITS

NMonthly payment (D) $2,697
 QLess monthly tax savings (J x K)$715 
RMonthly out-of-pocket (N - Q) $1,982
 SLess mortgage reduction (E)$480 
UNet monthly cost to buy (R - S) $1,502

Line D, total monthly payment, includes principal, interest, tax, and insurance, which are often represented by the acronym PITI. These four items are individually detailed in Lines E, F, G, and H. The monthly Principal (Line E) and Interest (Line F) are based on a mortgage interest rate of 5% per year for a 30-year mortgage. Real estate tax (Line G) and homeowner's insurance (Line H) are estimated. State and local income taxes are estimated to be 5% on Line M. Higher income taxes will produce greater tax savings on Line Q and lower the net monthly cost to buy on Line U. See your most recent income tax returns to verify your tax brackets (Lines L and M above). Compare the Net monthly cost to buy on Line U, with your monthly rent.

Depending on your situation, be sure to consider condominium fees and homeowners association fees if any; these 2 items are generally not tax deductible and are not included in the example. Another possible cost, mortgage insurance, generally will not be required with a 20% down payment. You will need to itemize your tax deductions to obtain the benefits cited in the example above. You might be able to deduct additional items not related to home ownership, but you will no longer be able to claim the "standard deduction."

The example above gives a very good approximation for the early years of your mortgage. Tax benefits in later years will be reduced due to your mortgage balance (Line C) being partially paid off which results in less interest being paid (Line F). However, your net cost (Line U) for later years will be even less, as increases in your principal reduction (Lines E & S) more than offset the decreases in your income tax deductions for interest paid (Line F).

Further, at a 4% (assumed) annual rate of appreciation over ten years, the $500,000 home in the example will provide $240,122 in appreciation. Appreciation of your home might not be a sure thing, but it can be a major benefit. Check IRS Publication 530 for the very latest, but current Federal tax law provides that most such gains on your principal residence are not taxable!

Disclaimer: Information above is believed to be accurate
but should be independently verified. Note well that
one-time, up-front costs of buying or selling, sometimes
called closing costs, are not considered in the example.


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APPENDIX B
TEN TIPS for FIRST-TIME BUYERS
***********************************

Below is the text of David Rathgeber's article “TEN TIPS for FIRST-TIME BUYERS” which appeared on the front page of the January 26, 1996 issue of the “Home Report” (published Fridays by The JOURNAL).

Today's low interest rates and favorable mortgage programs make it a great time to buy. Here is a Top Ten list of tips for first-time buyers.

1-Take advantage of current low interest rates. Did you know that a $1,000 monthly payment will let you borrow only $150,000 at 7% interest, but will allow $166,000 at 6%? And you can buy a lot more home for that extra $16,000. Do not miss your chance.

2-Calculate the benefits of home ownership. Actual numbers will vary but someone paying $700 in rent might be able to afford easily a $1,200 monthly mortgage payment. And the tax benefits that make this happen can come to you in each paycheck.

3-Hire a buyer-broker to represent you. In most cases, this invaluable aid will cost nothing. Your agent can be a much greater help than simply finding a home. Be sure to interview agents for the job and ask the critical questions, just as home sellers do.

4-Before making an offer, have your buyer-broker do a market-value analysis on the home that you have chosen. Use this analysis in planning your negotiating strategy. Also, be sure you have seen at least 20 homes in your price range in order to have your own view of the market before you make an offer.

5-When viewing homes for sale, pay attention to the obvious: Smile and act friendly toward the sellers, but keep your comments to a minimum. Avoid telling the sellers that you have just fallen in love with their home and that you must have it at any cost. Comments about your price range or timing also can compromise your position.

6-Give major consideration to the unchangeable features of the home, for example, the location, the style, the lot size, and whether it has a basement. Of less importance are the changeable features, the missing deck, unfinished basement, or the decorating that makes you gag.

7-The secret of finding the perfect home is realizing there is no perfect home! View your home search as a compromise. The very best home for you probably will not be absolutely perfect in every respect.

8-If you're buying a brand new home, be sure to avoid problems. There are unique and important considerations. Contract forms are not standardized and should be read extra carefully. Ask that your earnest money deposit be held in a real estate broker or settlement agent escrow account. These accounts are subject to strict governmental controls.

9-Find a good mortgage loan officer early in your home buying process. Ask about the special loans available to first-time home buyers. You'll be surprised how little cash it takes to buy a home.

10-Your loan officer should ask you the most important question: “How long will you be living in this home?” Your answer will lead you to the mortgage interest rate that will determine how much you can borrow. In addition, your lender is an expert in staying out of trouble: The guidelines that determine your maximum monthly payment are designed to keep you from getting in over your head. Your lender will also require a termite inspection, a title search, title insurance, and adequate fire and hazard insurance.

Remember, information is power. Get it from the local library, the Home Report, friends who have recently purchased; or a book. And before you get too far along the road, put your home specifications, needs, and preferences in writing. You might have to revise your specs, but having them on paper will be of great value.

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APPENDIX C
TAX ASSESSMENTS
*************************

A tax assessment, the value the local government assigns to a home for real estate taxation purposes, has only a very general relationship to that home's market value: It is so general as to be valueless. But some will tell you there is a direct relationship. They have not done an analysis and are relying on a very few bits of data, or are repeating “what everybody knows.” A careful analysis of the statistics proves them wrong, both over a wide area, as well as in an area as limited as a development or subdivision.

Of course, there is some average relationship between tax assessments and market values that can be calculated. But use of this figure to determine the market value of a specific home should be enough to make even the tax assessor giggle. While the objective might be to assess homes at "100% of market value," most of the results are not even within 10%.

Amazingly, elaborate calculation schemes or algorithms (pronounced: Al Gore rhythms) have been devised to predict market values from tax assessments. Although the mathematics are impeccable and some schemes have even gotten favorable press nationally, the fact remains that any calculation using basically flawed data, inevitably produces flawed results. Garbage in; garbage out. End of story. Be alert to anyone who tries to draw a conclusion from just a few cases. This is logically as well as mathematically unsound.

How long it has been since the tax assessor has seen your home? Never? There is no substitute for a properly prepared market value analysis or an appraisal, which are usually within 3% of market value. Mortgage lenders do not rely on tax assessments, and neither should you. Zillow, et cetera are just as inaccurate: Track down their disclaimer. They now report (2017) they are within 10% of actual market value 69% of the time. That means they are more than 10% off almost one-third of the time.

APPENDIX D
SELLING PRICE / ASKING PRICE
**********************************

The selling price to asking price ratio is probably the most important single statistic available on your market. When an agent is working with a buyer, it provides an indication of how much can be negotiated off the average asking price. Both you and your agent need to know this ratio so that expectations are kept within a reasonable range, and so that time is not wasted viewing properties that are obviously priced too high.

Sellers and buyers alike are usually surprised to find the ratio so high. It is often in the neighborhood of 95% or even higher. It must be understood that the ratio is calculated using data from sold homes. Therefore a seller cannot ask $300,000 for a home and end up with a (95%) contract for $285,000 if the fair market value is only $200,000. “The market” is much too clever for that, and so are you.

Another way to interpret the 95% selling price to asking price ratio is that the average home does not obtain a viable offer until it is priced within 5% of fair market value. With the price too high a seller will have no offers to negotiate, will lose hope, and become anxious. You can benefit from this scenario if you are prepared to do your homework and convince the seller to take your very low (but reasonably supportable) offer.

To verify the current selling price to asking price ratio, ask your agent to select at random 200 or more recently sold homes from the local MLS database. Data can be limited by type of home (for example, detached) or price range, in addition to contract date and geographic constraints. It is important to have 200 or more individual sales. Divide the total of all the selling prices by the total of all the asking prices to find the selling price to asking price ratio. Ask your agent to perform a search tailored to your needs. The selling price to asking price ratio represents critical information about your local market; do not rely on a guess or the 95% figure noted above for purposes of the example. It is so easy to obtain an exact, up-to-date reading. Ask your agent now.

APPENDIX E
HOME SELECTION CHECK LIST
**********************************

The following checklist can be used to select factors that are important in your home selection process. Of course, the criteria have basic importance to you as a home buyer. However, each criterion might or might not be searchable in our local MLS system. You will also need to make the further distinction between searchable criteria and reliably searchable criteria. Become as familiar as possible with details of our local system.

All searches will include the following criteria:
Category A - All MLS database searches will include the following criteria:

Category B - The following criteria are of major importance and are almost always included in search criteria:

Category C - The following criteria frequently are included in a search of the MLS database:

Category D - The following criteria probably are not of controlling importance in our local market but might be important to you. However, to avoid generating potentially misleading information, it is suggested that these items rarely be included in an MLS search. Even though the data below might be searchable, its input is often optional, and it is subject to interpretation, judgment, and inaccuracy:

Category E - The following criteria can be accurately evaluated only by a personal visit:

Category F - The following items might require further investigation:

The essence of an effective home search is methodically narrowing the thousands of available homes down to the one or two that are best for you. The process can be accomplished in three steps:

First, using Categories A, B, and C above, decide which of the factors are the controlling ones. Adjust the selection criteria until an MLS search produces 20 to 60 candidate homes. Review the details of each home carefully and select at least 15 of the best homes to visit.

Next, review the remaining criteria (which were not used as search constraints) in all categories above and select five to eight factors that are of greatest importance to you. Visit the selected homes and make your notes. Vary the complexity of this analysis to suit yourself. Remember to give more importance to the unchangeable factors.

At the end of your tours, select the two or three best homes. These are the prime candidates, the short-list. Re-visit the homes on the short-list and evaluate each one on every factor that is important. At the conclusion of these final visits, to be done all in one day, you will be able to select that special home, or better still, a first choice and a very close second.

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APPENDIX F
THE MARKET INDEX
*************************

The supply of homes can be combined with the demand for homes into a number that is an important measure of whether there is a buyers' market or a sellers' market. This market index, the months supply of homes shown below, is calculated by dividing the number of homes on the market by the number of homes sold in the same month. A number greater than 5.0 indicates that buyers have the upper hand. A number lower than 3.0 favors sellers. A number less than 1.5 is indicative of a “hot” market. Be sure to have your agent obtain your local data. You might be the only one with the real facts.
Market Index - Months Supply
Buyers who have a choice will plan their purchase so that they are negotiating with sellers at the time of the year when months supply is highest, September through December. Buyers buying in the peak season, March and April, will have the most difficult time.

APPENDIX G
HOMES ON THE MARKET
*************************

The number of homes on the market, or more specifically, the supply of resale homes, is an important indicator of how easy it is for you to find a suitable home. As shown below, the supply is usually greatest around mid-year. Have your agent generate this data for you.
Inventory - Homes on the Market

APPENDIX H
HOMES SOLD
*************************

The number of homes sold, or more specifically, the demand for resale homes, is also an important factor. Note that demand, or home buying activity, as shown below, is often greatest in March. Who would have guessed? But don't guess; have your agent track contract activity in the MLS database. Home buyers who can control when they buy should be active in the market between September and December. During this period, seller price flexibility should be at a maximum and competition from other buyers is at a minimum. Spring buyers, on the other hand, are most likely to face competition for the available inventory from other buyers. Bear in mind that most sellers mistakenly believe that the peak selling season is May through July.

Homes Sold
Caution: Homes sold information in the media can easily be two to four months out-of-date: The media reports frequently are based on closings, not contracts entered. Even the local media might be reporting closings instead of contracts entered. Be alert to this time lag. For example, the reporting of strong “sales” (closings) for June (usually reported in July or August) is probably based on contracts entered in April. Some agents will be content to quote the published figures. Get the correct and timely data for your market area and use it to your advantage. The rest of the world will catch up some day, but for now, you will be one of a very few with the important information.

APPENDIX J
HOT MARKET TRICKS
*******************************

If you are trying to buy a home in a hot market, you likely will compete with other buyers to win the home of your choice. You might find that the other buyers have a trick or two up their sleeve. It is indeed disconcerting to make an offer and have your agent report that there were 6 other offers and yours was rated fourth. The listing agent who was marketing the property and helping the seller consider all the offers, might very well have shared some of the reasons why your offer was not chosen. But at this point it does not help. There's only one winner, so for you and the other unsuccessful buyers, it's back to "GO."

Before your next offer, consider the ideas below, first according to their negative impact upon you. Then consider them as if you were the seller, being the recipient of these beneficial terms in a very competitive market. While sellers are a diverse group of individuals, most share a common trait: Doing what is best for themselves, giving nary a hoot about the hoard of poor buyers groveling at their doorstep. Your agent should inform you of your options below and be willing to incorporate any of them into your offer. However, your agent should not be pushing you to use any of these ideas, or even be recommending them.

If you decide to offer a price higher than the list price, the adverse effect on you can be measured in dollars. If you are trying to buy a home in a hot segment of a hot market, nearly all of the winning buyers will be paying more than the asking price. If you cannot do this, consider waiting a few years to see if the market cools off. Then there will be less competition.

You might include a price escalation provision in your offer which will allow you to out-bid other buyers by a certain amount, up to a maximum price that you set. Therefore, you can offer a reasonable price on your main contract form, and know that you will only pay more if it is needed to win.

Asking the seller to provide a one year warranty for you is definitely a bad idea in a hot sellers market. Some competing buyers have lost the home of their choice over this issue alone. If you really need a one year warranty, there are several commercially available policies you can purchase. In any event, forget asking the seller to pay “points,” or to give any other credit as is popular in a buyers' market.

If you waive the financing contingency you should be very, very sure that you can obtain a mortgage: If something goes wrong with your final loan approval, your earnest money deposit might be lost, or even worse. If you waive the appraisal contingency, you should be sure that you have cash to cover any shortfall in the mortgage amount.

Perhaps you will waive the home inspection. If you are buying a condominium, you might have limited exposure in foregoing a home inspection. With a detached home or townhome, you should personally inspect the property and be confident that there are no major defects. Be especially alert for roof deterioration; foundation damage; basement dampness; leaky plastic water supply piping; synthetic stucco (EIFS) problems; asbestos that could become airborne; buried tanks even if they are unused; and in townhomes, defective fire retardant treated (FRT) plywood. With this done, your risk of major problems is minimized, but it does still exist. An alternative idea is to do a home inspection “for information purposes only.”

Many buyers forego a lead-based paint inspection. First, there should be no lead-based paint problems in homes built after 1978. While older homes could well contain lead-based paint, this is not necessarily a problem. Be sure to read the EPA's booklet on the subject so that you can make an informed decision.

You might also waive a mold inspection. Mold itself has been around since the beginning of time, but recognizing mold problems in homes is receiving increasing scrutiny. You might need to test if there are unusual signs of moisture, discolored surfaces, or a damp, moldy smell. Also consider whether you are an individual who might be especially sensitive to mold.

If you accept the property in as-is condition with no inspections, you are exposing yourself to the widest variety of potential problems. Laws in some jurisdictions require an individual seller and the agents involved to disclose any significant, known problem; check this out.

Foregoing a final (walk-through) inspection might be an option, but is not advisable. The most important finding of the inspection is that the home is not occupied, and has been left in reasonable condition.

If you need to sell your current home in order to buy your next home, have it under contract before trying to buy a home, as most sellers will not consider offers with a sale-of-home contingency. Ignoring the contingency will not make it go away: It merely conceals an important financial fact from your seller, and therefore can land you in legal hot water.

If you waive the contingency for lender-required repairs you are undertaking an obligation to have such repairs made to the home you are buying, at your expense, before closing. It is not a sound business decision to spend your money on a home that is not yet yours. For a home that appears to be in reasonable condition, lender-required repairs are somewhat rare if you are obtaining a conventional loan. Such repairs are somewhat more common if you are obtaining a government (VA or FHA) loan. Hopefully, no repairs will be anticipated, no repairs will be required, and all parties will be happy to leave this contingency as written with no changes.

The information above is the tip of the iceberg, be sure to discuss the ideas fully with your agent, make an informed decision, and win!

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APPENDIX K
DON'T OVERPAY on a HOME
*************************************

Below is the text of David Rathgeber's “BEFORE YOU OVERPAY on a HOME” which appeared in the September 11, 1998 issue of the “Home Guide” (published Fridays by The WASHINGTON TIMES).

Offering more than the asking price might be a good idea but some qualification, amplification, and background information should help. As the spring market heated up, buyers found they were losing home after home to other buyers. Agents and buyers alike had to shift gears in a hurry in order not to be left empty-handed.

No sure way exists to lock up the home of your choice until the contract is signed, sealed, and delivered. Let's first examine the case where there are other offers, a complex situation that requires the experience and judgment of a seasoned agent. If you want to have the best chance of winning the home of your choice, offer as much as you can. But unless there are other offers on the table, offering more than the asking price is neither necessary nor advisable.

Many things are just as important as the price, whether there are other offers or not. Have your financial information in order and ready to present if needed; get a pre-qualification letter from a recognizable (name brand) lender; better still, get pre-approved for a loan. Your qualifications are often more important than your offering price.

Offer as high a price as you feel appropriate. Most homes are selling at or near full asking price. But it is your responsibility to verify the value, both from your own market knowledge and from your agent's market analysis. Yes, agents should be doing a market analysis for their buying clients just as they do for their selling clients.

Make the choice of an agent a conscious one, just as sellers have been doing forever. And be sure to hire an experienced negotiator and a clear communicator.

There are books available to help you accomplish this. All agents are not created equal. Be sure your agent has convenient access to the MLS computer. Getting a one or two day jump on the other buyers can minimize the chance of other offers.

Make sure your agent can be contacted at a moment's notice. Communications technology can rule the day when the going gets tough. In this market, delays favor the seller, so keep negotiations moving. And as always, keep your eyes open; seek the best advice, and good luck!

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APPENDIX L
PUT the NEWS into PERSPECTIVE
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Why are the "pundits" telling us all this baloney? What do they think we should do? Sell our homes and live with mommy and daddy? With the kids? In a tent? Stop buying homes? I'd be happy if the Wall Street folks could give me an accurate prediction of the stock market, where they should be the experts! I'll be a bit worried when Realtors on TV start telling me what stocks to buy!

Here are some important questions you should ask yourself about the news:

When you examine the underlying data, you might ask:

Of course, radio and TV news spots and newspapers have time and space constraints that make answering all the above questions impossible. So, it's up to us to decipher the truth. Unfortunately, this is well beyond the scope of most listeners and readers, the savvy folks like us being a small minority. Isn't listening to the news just a recreational activity anyway?

Remember that "what everybody knows" is not always right, even when it sounds right. Get your real estate advice from real estate folks, not ignorant Wall Street lemmings. Monitor the local economic conditions including employment, and most importantly, housing supply and demand (yes, the Market Index). And when you are making those really important decisions about your personal housing, good luck!

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GLOSSARY
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APPRAISAL - An estimate of the value of real estate provided by an expert, the appraiser. In many states, appraisers must be licensed.
ASSESSMENT - Also tax assessment or assessed value. The hypothetical value assigned to real estate by the local government tax assessor that is used to determine the amount of real estate taxes to be paid, nothing more.
BUYER-BROKER - Also buyer's-agent. An agent who is representing the buyer's interests in a real estate transaction. It was once customary for all agents to represent the seller, but buyer-brokerage has become very popular in our area.
CONVEY - To transfer ownership.
FHA - The Federal Housing Administration, a government agency that facilitates mortgage loans.
FRT PLYWOOD - Fire Retardant Treated Plywood. This material was used in the roof construction of some attached homes in some areas. Over time, it can become structurally unsound and roof replacement is then required.
HUD-1 FORM - The form used at closing to account for the financial details of the transaction.
LISTING AGENT - The real estate agent hired to be directly responsible for the marketing and successful sale of a home.
LOCKBOX - Also called keysafe. A strong and secure box attached to the outside of a home, frequently to the doorknob, which contains keys to the home. It is accessible to real estate agents who have a special key to open the lockbox. It facilitates home sales by making the home readily accessible and easily shown to prospective buyers.
MARKET VALUE - Sometimes called fair market value. The price agreed between ready, willing, and able buyers and sellers, providing neither were under undue pressure to act. In most cases, market value and contract price are identical.
MLS - The Multiple Listing Service is an arrangement by which real estate brokers (and their associated agents) agree to sell homes being marketed by each other (sometimes called listings) and to share the resulting commissions. An MLS computerized database is a critical factor enabling the exchange of information and thereby facilitating the sale or purchase of real estate.
RADON - A colorless, odorless, naturally occurring gas that is a potential health hazard. It can seep out of the ground and accumulate in homes.
SELLING AGENT - The agent who brings the buyer, shows the home to the buyer, and helps the buyer prepare the offer. This could be the same person as the listing agent but usually is another agent. Historically the selling agent was an agent of the seller and had fiduciary responsibilities and owed loyalty to the seller, in spite of the fact that the selling agent was “helping” the buyer. The practice of selling agents who are the agent of the seller is almost extinct in our area. (See buyer-broker above).
SHORT SALE - A sale where the mortgage against a property exceeds the property's net market value. Buyer beware!
STATISTICAL SIGNIFICANCE - A mathematical concept, too infrequently applied to real estate publications, which holds that in order for a conclusion to be meaningful, it must be based on a sufficient number of observations or individual bits of data. A complete treatment of the subject is far beyond the scope of this book, but the concept is important: Depending on the data set being analyzed, there is a certain minimum number of individual data points required in order for the conclusion to be reliable. For example, just because one can calculate an average, does not automatically mean the resulting value can be used to draw conclusions about the global data set that gave rise to the average.
UFFI - Urea-formaldehyde-foam-insulation. A potential health hazard resulting from vapors that might be released from the insulation into the home.
VA - The Veterans Administration, a government agency that facilitates mortgage loans.

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