Thursday, May 30, 2013

First time home buying experience in Massachusetts

I have been house hunting for the last few months and have learned a whole lot of what it means to buy a home along the way. There are misconceptions to real estate that will exist until you are faced with the task of buying a home, but you can get a head start by attending a first time home buyer's course. The courses are offered anywhere from free to a nominal fee and is a great resource for the target audience as well as a qualifying criteria for some incentive loan products that wouldn't otherwise be available to you. One of the things that the course will tell you is to assemble your home buying team. First and foremost you should have a buyer's agent who can help guide you through the weeds. I will leave links to the various people that I've worked with at the end of this post in case you live in the greater Boston area and are seeking reliable people to fill out your roster. You should also have your buying strategy figured out such as deciding ahead of time if you want the seller to cover closing costs. While having the seller pay the closing costs isn't atypical it may deter you away from certain sellers. Conversely keep in mind that closing costs on a single family home can range form $2,500 to $5,000 and condo's closing costing more.

Every market is unique and I have been looking for a place in eastern Massachusetts with the goal of remaining within a reasonable commute to Boston and Cambridge. For my target area the property I purchase will likely be an existing structure since developable lots (assuming that you can find one in the city to begin with) have other financial challenges. For the sake of explaining it let's say you find a lot for $120,000 and you want to finance it. Traditional mortgage for an existing home can accept a down payment as little as 3%, but for developable land You will need to plunk down 50% of the lot's sale price to have a bank finance it. The reason for the higher down payment is because banks are afraid of the lender walking away from the mortgage if the lender isn't deeply cash committed. To continue our example, the $120,000 lot would need $60,000 down for a bank to finance it and be confident that the lender will repay the loan versus 5% down which would be $6,000 and feasible that a lender may walk away from the mortgage without suffering a substantial loss.

If you are in the position of putting down half for a lot, you still need to consider the cost of building your dream home. Look around the street and locate the closest fire hydrant which will indicate where the water and sewer lines are. The further away you are from a hydrant, the more it will cost to plumb for water and sewer. You maybe in an area that sewer service isn't available and will have to bury a septic tank in the ground which limits your foundation size in relation to septic tank size and building code. The street may not have gas service and you will have to use propane, electric, or oil for your heating needs which are far more expensive options compared to gas. Maybe your street does not have gas run all the way down to your lot and will need to pay to have the gas run the rest of the street. While new constructions have ideal floor plans and have little to nothing wrong with them, your loan product becomes complex and may not qualify for a more favorable rate compared to a traditional mortgage. An alternative to consider is to put down 20% on an existing home to be free of PMI and either buy points or plan for renovations with the remaining cash to turn the existing structure into your ideal home.

It has been a buyer's market since the real estate bubble burst, but lately approaching an artificial position that is nearly a seller's market due to constrained inventory. Our economic climate has directly impacted the national inventory shortage by forcing home owners to hedge against uncertain times by staying in their homes longer. The shortage of new jobs which traditionally incited a homeowner to move has also contributed to the inventory shortage. People who bought a home at the height of the real estate inflation are just now coming out from being underwater and are either selling or refinancing their home. Those that are selling are in a position to receive a better offer on their home with the inventory constraint which lends to the artificial perception of it being a seller's market as a result. I think that the market will even out between buyers and sellers in New England throughout the remainder of 2013 as being in the northeast we experience an increase in inventory and sales activities during warmer months versus the colder months of the year.

One thing preventing another real estate inflation is the practice of an impartial third party to appraise a home. The home will appraise at fair market value with consideration for renovations and condition of the house which insures that the bank isn't approving a risky loan worth more than the property. The appraisal is submitted to the lending party and if it appraises lower than the agreed sale price, a rebuttal along with a Comparative Market Analysis (CMA) can be sent by your agent to provide additional data to recalculate the value with. Even with a rebuttal the home cannot be valued above reasonable market value and this adds a layer of protection to the buyer where it is no longer possible for the seller to demand whatever they feel is right and expect a bank to agree with them. Once the appraisal is finalized, that is as much as the house can be sold for at that time. This is why it is critical that the seller remains realistic about what their home is worth. The constrained inventory is forcing fast actions from interested buyers often resulting in multiple offers submitted to a property priced to current market value. I have also seen properties sit on the market for a long time because the seller is expecting an unrealistic return on their investment.

The question that plagues every first time buyer is how does one know which house is the right one? This question is easily answered if you prepare a list of what you need at a minimum and what you want in an ideal home. To give you and idea I was looking for a single family home in select towns to meet my commute goal and I need 2 bedrooms, driveway, and a dry basement. Ideally I want a third bedroom or office, second full bath, and a garage. My list helped me narrow my choices and reveal listings relevant to me. Finance is an obvious constraint and is important to be pre-qualified by a reputable lender to know how much you can make an offer up to. Ask your agent for a lender recommendation if you haven't approached one yet. Once you've been pre-qualified use a mortgage calculator to figure out what monthly payments will look like to prevent biting off more than you can financially chew per month. The calculator in the link has you input taxes and insurance and computes your projected payments with PMI. It will also help you understand that when it comes to dealing in hundreds of thousands over a thirty year term that a difference of $10,000 makes for a negligible change in your monthly payment. Understanding this difference will better prepare you for negotiating an offer quickly. A bill that you will not have had as a renter is a water bill and the city you are looking to buy in will typically have a website that can tell you how you are billed and at what rate. Now that you know what features you are looking for in a home and how much you are willing to spend, it's time to start looking in person.

The first time you see a house it is both weird and exciting. In a short time you will master the process and will be able to figure out quickly if the home is right for you. Keep in mind that superficial things like paint color and wallpaper can be easily changed and shouldn't affect your decision. I remember the very first house that I saw which was a bank owned property in rather miserable shape. I walked through the front door and loudly declared, "nope" and that was my first taste of not liking a house and the end of my first viewing. I was told that you will know if a house is right and it's true, I knew the first house wasn't the place for me within seconds of walking in. A phenomenon that I have been experiencing is the ideal photo problem, or the inverse ebay law. eBay sellers are aware that buyers are favored in a dispute and would rather put up clear example of the sale item to mitigate negative feedback where else in real estate you see pictures of a home on MLS or Trulia and it looks amazing until you see the place in person and have to stand in exactly the right place at the right time of day to have it look as nice as it did in the pictures.

It's important to check if the listing is accurate against the house with simple mistakes like gas heat listed in place of oil heat or omit details that would otherwise make a likable feature a moot point such as having to walk through a bedroom to get to another bedroom. The weirdest example by far was a listing that supposedly had 1.5 baths. I walked in and saw immediately that the pictures grossly misrepresented the property and knew that the place wasn't for me, but since I was there I figured that I would get my house looking practice in. I located the first bathroom in the kitchen which is a little weird in it's self, but could not locate the half bath on the second floor or in the basement. I was just about to leave as I noticed a panel that leads to the attic. I pulled down the panel by the string and revealed the folded ladder to get up to the attic to discover there in the open is the half looked as if the previous occupant had someone chained in the attic. In short I found the sloth room with the open concept prison style bathroom. (Ew! Seriously, who puts a bathroom in the attic and why would you leave a toilet exposed?)

Then there is what I dubbed as murder house which is a large colonial duplex listed as a four bedroom condo with a driveway and garage. The pictures of the unit showed stunning high arched ceilings and a promise of a large living space with condo convenience. I drove up the driveway and felt like I was driving on set to shoot an episode of Hoarders when I saw various crap everywhere in the driveway, against the three car garage, and in all garage bays. The steps leading to the front door is clearly neglected and wondered how the condo association hasn't repaired it yet. Past the front door is a foyer and once I figured out which of the three doors was the right one it opened to stairs that lead to the second floor unit. Exploring the place I found additional signs of hording on the vacant side and began to suspect that it is a multi-family owned by a single person who is trying to pass it off as a condo. The extra hoarding room is an obvious addition to the house at first glance as evidenced by the original roof cutting into the room. Being within arm's reach of the shingles I was able to see that the roof has been improperly taken care of with countless layers of shingles atop another that made for an overall thickness of 7~8 inches in shingles alone. I found another stair case in the back of the place and went down the stairs to find a narrow short hallway with a door at the end. I approached the door when I heard what sounded like strange music played on a Victrola (I kept picturing in my mind the sewer scene in Hellboy where Karl Ruprecht Kroenen is seated listening to a Victrola) and that is when it struck me that I was now behind the 1st floor resident's condo (realize there is no door on the second floor, only the door for the first floor condo which is creepy to think that your neighbor has easy access to your place. Compound that with the super creepy paintings in that short hallway to just make it all worse). It was at that moment that I felt that I was no longer on an episode of Hoarders but in a horror/slasher film and decided against making previous level slasher victim maneuver by exploring any further and risk losing life and limb. You need to look at every place you think maybe the one and see for your self as realty tends to tell a separate story from what the pictures represent.

Once you decide on a place you will submit an offer to the seller or the seller's agent. Don't worry if you've looked at a few places and haven't found anything yet, I looked at at least a dozen places before my first offer materialized. I know one couple that looked at ninety places before circling back to the very first property that they looked at and another couple who are the outliers that found a place within the first three places they looked at. Your agent will provide a CMA which compares similar properties recently sold within a mile (unless you are in the boonies) to give you a view of what current values are for that particular neighborhood as well as if values are trending up or down. You should listen to your agent's invaluable advice who's experience and insight will aid you in making an offer. The overall shape of the home and nuisances that may detract from the enjoyment of your home should be taken into consideration as well as the age and condition of appliances, HVAC, and water systems. You should also understand the difference between an upgrade and maintenance. Adding a second bath is an upgrade and should positively impact the resale price while replacing a twenty year old water heater is maintenance and you shouldn't be expected to shoulder the previous occupant's maintenance cost. Additions and remodels increase value and maintenance maintains value. Conversely lack of maintenance decreases value and just because an addition or remodel is made it doesn't necessary add value if it didn't update or improve the home.

Some sellers have taken these factors into account and price accordingly while others are greedy or clueless. Unless you offer asking price expect it to be countered. Countered doesn't mean rejected and you have to negotiate a price that both parties feel fair with, but if it is rejected you either offered too low to consider or you have a seller that wants too much. If the seller's counter is reasonable than there is no reason to keep going back and forth, but if you still do not feel that the price is fair than counter back. Be careful of emotionally vested sellers who may not be motivated to sell their home as well as becoming emotionally involved yourself. Yes, the buying process can be stressful and emotional at times, but it is a business transaction after all.

You will often hear that no one can tell you what a fair price for a home is except for yourself. Well, that really isn't a relevant statement these days when the buyer has so many resources available to determine fair current value. Along with your agent's expertise there are various web resources for prospecting home buyers such as Trulia and Zillow. Between the two sites I prefer Trulia for one invaluable feature: Sold Homes near. With this feature you have a filtered list of homes sold near the property you are interested in and gives you an overall average price on square footage as well as historical pricing in the area. This feature has helped me figure out on so many occasions if a home is over or under priced for the market and helped me avoid the pitfall of emotionally answering the fair price question. Other useful features are what the home sold for previously and nearby school ratings.

Once an offer has been accepted you should schedule an inspection. There will likely be very few surprises, but if there are tons of surprises than there maybe more problems than meets the eye. An inspection will always find something, but they aren't necessarily deal killers. After the inspection you should negotiate to either fix things that were discovered during the inspection or for compensation in the form of a lower sale price. I had one woman who was pretty unreasonable to work with during the offer phase and after the inspection revealed around twenty things on her home. I made a list in order of importance what I wanted repaired, replaced, or lower the sale price to reflect the defect and stated that the first two items were non-negotiable. The first was presence of WDOs (Wood Destroying Organisms, A.K.A termites and carpenter ants) that I wanted treated and any associated repairs performed. The second was to replace the basement windows. When I made the offer on the property I was informed that all windows were replaced but I discovered during the inspection that the basement windows were not replaced and were rotting out. She came back saying that she would only address the WDOs and nothing else which prompted me to walk away from the deal. Don't be afraid to walk away, the seller is not your friend and you have no obligation to stick around for a bad deal.

Once both parties agree on the inspection items you will contact your attorney and insurance agent. If you do not have an attorney than ask your agent for recommendations which may have hidden perks such as my attorney representing both myself and the lending institution without an additional cost. Once your attorney engages the seller's attorney you just have to wait. Title insurance is something that will appear as part of your closing costs but is seldom discussed at length. Despite the name it is not offered by your insurance agent, but by your attorney. Title insurance is mandated by your lender to avert any risks to the title that may exist when purchasing your home. What is seldom discussed is your option for Enhanced Title Insurance that protects the buyer after the home is purchased from unforeseen risks. Cost difference is negligible, but the coverage difference is huge and you should just tell your attorney that you want the enhanced option. The initial P&S will be drafted by the seller's attorney and attorneys will draft back and forth until all addendum and contingencies are satisfactory to both parties at which point you will be presented with the final draft to review. Once you sign the P&S it will be delivered to either the seller, seller's attorney, or sellers agent depending on the the P&S requirements along with your earnest money and will be countersigned by the seller and the P&S is fully executed at that point.

Copy of the fully executed P&S will be sent to your lender and your lender is free to apply for a mortgage on your behalf. It is at this point that your attorney will be contacted to get a list of fees for the closing which are both attorney's and regulatory fees;

Attorney Fees
Title Exam
Obtain Municipal Lien Certificate (MLC)
Rundown and Record
Lender’s Title Insurance
Owner’s Title Insurance
Survey/Plot Plan
Prepare Homestead
Record Mortgage with state
File MLC
Record Homestead

From this point forward unless you are contacted by your lender for any documentation required by a bank, you simply have to wait until the closing date. If the title and mortgage are available before the closing date, it is possible to have your agent contact the seller to see if they would like to move the closing date up in exchange for receiving the check sooner. Good luck and happy hunting for your first home.

As promised, here are the people to comprised my team;

Agent: Rick Nau, Ascend Realty Group

Lender: Dick Lee, Independent Mortgage, LLC.

Attorney: Ann Tran Mullin, Lee & Associates, P.C.

Inspector: John O'Riordan, Old School Home Inspections