Nolo’s Real Estate Tips for Home Buyers

In the hottest of real estate markets, prospective buyers would write desperate, hopeful letters to sellers, describing how much they loved the place and the reasons the seller should choose them — reasons beyond generous overbids and offers with no contingencies, even. (I know someone in San Francisco who wrote 9 such letters, on 9 different houses, before having an offer accepted.)

But a recent New York Times article suggests it’s time to write a different kind of letter. This letter accompanies a very low offer — with an explanation about what else is available in the market, and suggesting the seller is lucky to get an offer at all. It recognizes the buyer’s driving the transaction now.

Reading the letter, though, it struck me that there were certainly nicer ways to say the same thing. Don’t get me wrong, I’m not opposed to the idea on the whole. But sellers see their homes so personally, so writing an almost threatening letter is risky. You might get a matter-of-fact, businesslike response from a sensible seller. Just as possibly, you might be indignantly ignored by the seller (or in many cases these days, ignored by a bank, which doesn’t care what relative value you place on the property), who’s raised a family in the home you’re now talking about like a commodity. Which it is. To you.

My guess is that there’s less to be gained in using a letter threateningly than in using it to butter someone up. Even if a desperate seller is willing to sell to you, maybe just to avoid foreclosure, he or she is likely to feel you’re taking advantage of the situation. And instead of feeling like a business transaction, it will feel like a personal assault. I don’t think such a letter would inspire “doubt” or “fear,” as the article suggests. More likely anger or disgust, and at best a begrudging acceptance to go through with the transaction if there are no other options. Granted, you’re not trying to be lifelong friends with the seller, but it would be nice not to be hated from the other side of the negotiating table.

The recent flooding in the Midwest is a reminder of a single act of nature can have homeowners running to their insurance policy for help — only to find, in many cases, that they’re not covered. Recent news reports say that a tiny minority of homeowners in Indiana and Wisconsin had flood insurance. As is typical, some say they didn’t think they were in a flood plain, and that their lending bank didn’t require flood insurance to be included in their policy.

We said this in our book, Nolo’s Essential Guide to Buying Your First Home, but we’ll say it again: The flood zone maps are not always up to date, they’re drawn to such a large scale that they’re not necessarily accurate for individual properties, and they have traditionally identified flood areas based on the worst flood likely to occur in 100 years, or 1% of the time.

Meanwhile, flooding is the United States’ most common natural disaster, affecting many people who live nowhere near water. Melting snow, overflowing creeks or ponds, a weak levee, or water running down a steep hill can all cause flooding. And experts say climate change is making it worse by bringing more severe storms.

Does that mean everyone needs flood insurance? Probably not (though it is relatively affordable if your house is not in a designated, recognized flood plain). But before finalizing your insurance policy (assuming you’re just buying a home) or renewing it (if you already own), check with your neighbors, the local flood control board, and your city building department about recent trends.

A good credit record and score has always been important, but with the tightening up of the mortgage industry, people with a low score may have a harder time than ever buying a house — a shame, if you want to take advantage of recent dips in home prices.

But, warns Kenneth Harney, that’s no reason to pay money to the various companies that promise to not only raise your credit score, but find you an affordable home in foreclosure and a low-cost mortgage to boot. For details of the consumer complaints and FTC lawsuits that these companies have engendered, see Harney’s article in the San Francisco Chronicle.

As for raising your credit score, you’ll have to do it the old fashioned way: by paying down your debt, paying bills on time, and more, as discussed in Nolo’s article on Credit Scoring.

A recent poll of residents of the world’s eight richest cities reveals that over 40% of Tokyo’s residents don’t want to sacrifice a convenient lifestyle to prevent global warming. While these results may seem startling, consider that the average house size in Tokyo is 64.5 square meters, or 694 square feet (not to mention that many residents probably take public transportation to work, and drive cars that put American gas guzzlers to shame). To really make a positive environmental impact, those of us who are quick to pat ourselves on the back for our eco-friendliness must think beyond bringing our own bags to the store and driving hybrid vehicles.

And there’s no better time to think about these issues than when buying a home, which leaves a (literally) big footprint. While some features — energy efficient appliances, CFL light bulbs — can be added later, some “green” features are permanent. Consider these important factors:

• The size of the home. A few months back, I read an article about a woman in California’s Central Valley who installed solar panels on the 3,000 square foot home she lived in, apparently alone. She was quite smug about her positive environmental impact. But she could have had done even better by choosing a smaller home that took fewer resources to build and could be heated and cooled more efficiently.

• The age of the home. Older homes sometimes don’t have energy saving features, but can often be adapted to include them. Two years ago I had better insulation sprayed into my attic; it almost paid for itself with the rebate from my utility company, not to mention my lower heating and cooling bills. Again, fewer natural resources are spent when an old home is updated than when a new one is built.

• The size of the lot. A large grassy lot could mean a great place for dogs and kids to play, or it could mean heavy water use, toxic weed killers, and hours of upkeep time. If you don’t buy more lot space than you need, you’ll save yourself hassle, money, and environmental impact to boot.

Alayna Schroeder

Has residential real estate bottomed out? Or, put another way, is this the time for home seekers to buy? My answer is yes, no, and maybe.

First, the yes: Relative bargains still exist in those certain areas where the foreclosure rate is low and are also located near good transportation links, which can be a great opportunity for today’s buyer. I say “relative” because in many of these areas, prices have fallen less than 20% and are unlikely to fall much more. Why? In part, because many up-market sellers can afford to wait out the down market and simply not put their houses up for sale. And then there’s the fact that in more affluent neighborhoods, few people took on risky, no-down payment, adjustable rate mortgages in the first place.

But the buying opportunities that exist aren’t for everyone. With new mortgages still relatively expensive, you need to make a chunky down payment (often 20% or more) and have adequate, documentable income in order to play in this game. Many younger buyers deal with this by having a more affluent parent make a gift of part of the down payment (perhaps treating this as an advance on an eventual inheritance, to keep siblings from going ballistic), or the parents might guarantee the loan.

Now for the no: In overbuilt subdivisions, such as many in Nevada (especially the Las Vegas area), Florida and California, it’s far too early to buy. That’s because cash-strapped builders are still dumping new houses on the market, further depressing the prices of those built in the last few years. And with foreclosure rates still rising in many of these areas, prices have further to fall.

Other places to avoid are the lower-income areas of cities and suburbs. Because so many people who could never reasonably afford to make required payments got loans in these areas, this is where the housing bubble was the worst and foreclosure rates the highest. Or, put another way, lenders in these areas will be dumping more and more distressed properties on the market, meaning that prices have only one way to go.

But, as with any advice, there are caveats, exceptions, and qualifications when predicting the direction of real estate markets, especially given the peculiarities of local micro-markets. In short, when some factors point to an improving local market and others still point down, you may be looking at a “maybe” area.

Those McMansion-type newer houses in the outer suburbs are likely suspects for “maybe” areas. In some locations, prices for these 5,000-square-foot behemoths have fallen by a third or more, which would normally indicate a buying opportunity. But the furious rise in gas prices have put this normal conclusion in doubt (except for the few houses in this category that are near good public transit). Otherwise, many buyers suddenly faced with a dauntingly expensive commute are likely to say no, meaning that prices may still drop.

Also, in upscale locales where new houses are priced to reflect their location — on or near a golf course or near some other large amenity — you’ll want to be sure that the supervising corporation is and will remain solvent, even with a large number of houses remaining unoccupied. Otherwise, you may find yourself overlooking a water-parched rabbit patch, which will do precious little to protect your investment.

Jake Warner, guest blogger

According to a recent article found at Inman News, Realtors® are making less this year than they did last. Those with two years of experience or less fared the worst, while those with 16 or more years of experience fared best.

Given the state of most real estate markets, these results aren’t surprising. Experienced agents know what they’re doing, so they know how to find business and get satisfied return customers. Even though they may be closing fewer transactions then they did last year, and even though each of those transactions may be worth a little less, they’ve weathered down markets before and will probably come out alright on the other side.

This is all good news if you’re a buyer. After all, most agents aren’t struggling to get enough listings, they’re struggling to find buyers to purchase them. That puts buyers in a prime position to get the best possible service. Here are a few tips on what to look for:

• Personal service. As veteran Realtor® Mark Nash explained to me, the best personal service often comes not from the top producing agents, but the midrange producers. That’s because top producers may have assistants that show you homes, answer your calls, and might handle everything up to writing the offer. As a result, the experienced agent or broker knows less about your needs and whether the home you’re considering meets them. Make sure the person you hire is with you every step of the way.

• Experience and expertise. Veteran agents have years of experience, but you want to make sure they’ve been in your current market long enough to know the ins and outs. Also, ask about special certifications — they may be an indicator of specific experience and a commitment to the profession.

• Lower fees. Though the seller’s agent traditionally gets paid a 5-6% commission that he or she splits with the buyer’s agent, there’s nothing dictating these amounts. Don’t be shy about negotiating for less, especially if you’re thinking about buying a listing from the agent’s brokerage. If this isn’t your first purchase and you’re staying in the area, you may be able to get a discount if you list your old home and buy a new one using the services of the same agent.

Alayna Schroeder

For many new homebuyers, one of the most exciting things about buying a house is having the space to garden. For the first time, you may have a little dirt to call your own, and a million ideas about how to fill it. That’s great, but my advice is to take it slow. I’m living proof that if your ambition out-paces your knowledge of gardening realities, you could end up with a lot of dead plants.

When I bought my first home years ago, one of my first purchases was the Sunset Western Garden Book. I happily spent weekends weeding the overgrown backyard, buying and planting hundreds of dollars worth of new plants, and learning about mulch and ground covers. I was determined to turn my small yard into an English garden, and I succeeded (at least for a while).

But as time went on, I found myself enjoying gardening less and less. Money I used to spend on manicures and dinners out now went to new garden tools and the latest non-toxic snail bait. Rather than hike with friends in beautiful parks, I was alone in the dirt, nurturing my tomato plants. Gardening seemed the thing every new homebuyer should do, so why I was resenting it? Thinking I should scale back, I bought every book on low-maintenance landscaping, only to learn there’s really no such thing. (Gardening’s only easy is if you pay someone to do it all for you.)

I gradually started letting go and found myself happier shopping for vegetables and fresh flowers at the farmers market rather than growing my own. I started buying more novels instead of gardening books, and reading instead of weeding.

Before long, my once beautiful garden began to return to its original state of disarray. I looked for as many ways as possible to keep my little yard full — outdoor play structures for the kids, a hammock, bird feeders, little lawn ornaments (though I didn’t go so far as pink flamingos). My gardening friends were appalled: How could you let those perfectly good plants die? Well, like the person who finally admits they really don’t like to cook (or shop, or redecorate), I have finally reconciled myself to the fact that I am not a gardener. At least with the recent emphasis on conserving water, I have an excuse when people inevitably ask, “What happened to your garden?”

Marcia Stewart

I must admit—I have absolutely no intention of moving anytime soon, but every now and then, I look at what’s available. Just the other day I found a house that looked promising. For its size and location, it’s underpriced by at least 10%. My interest piqued, I scrolled through the pictures. A pool. Ugh. I don’t want a pool. (I promise, I’m not buying anytime soon. Even if I am picturing myself in each house I look at.)

It got me thinking about the buzz I hear now and again—does a pool add value? And the resounding answer? It depends. I grew up in the desert community of Lancaster, California—almost every house had one. But the house I was looking at is in a cooler, more eco-conscious northern California city. Does a pool add value in Lancaster? Yes. Does it add value where I live now? Probably not.

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Homebuyers, homeowners, real estate agents, and mortgage brokers have all been awaiting, with high expectation, details on the new “jumbo light” loan limits and lending standards. Everyone had hoped these new loans, authorized by the Economic Stimulus Act of 2008, would provide lower interest rates for folks trying to buy or refinance homes in high-cost markets.

Well, the lending limits and standards are finally here, and (drumroll please) it looks like these new loans will do… nothing. That’s right. Due to heavy restrictions on the loans, most people won’t qualify for one. And even if they do, the interest rates are still much higher than those for traditional conforming loans.

What does this mean? For starters, people living in high-cost real estate markets that are having trouble meeting their mortgage obligations, or are already behind in payments, won’t get relief from a jumbo light loan. Those folks will (1) continue to struggle, or (2) join the large ranks of those in foreclosure. And those trying to buy a home in a high-cost market won’t get help from jumbo light loans either. So much for economic stimulus.

Here are the details of how all this works:

What Are Jumbo Light Loans? In the past, Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) could guarantee real estate loans up to $417,000. In a nutshell, the guarantee meant lower interest rates for those loans — which, in turn, made them more affordable. Loans above $417,000 (called “jumbo loans”) carried higher interest rates, due to a perceived greater risk. In its Economic Stimulus Act of 2008, Congress authorized Fannie Mae, Freddie Mac, and the FHA to guarantee (until December 1, 2008) mortgages as large as $729,750 in some high-cost markets.

This creates three types of loans:

(1) Traditional loans under $417,000 (called conforming loans).

(2) “Jumbo conforming loans” or “jumbo lights” (between $417,000 and up to $729,750). The upper lending limit depends on where you live. To find out what the limit is in your area, check the HUD FHA Mortgage Limits.

(3) Jumbo loans (loans over $729,750 — or less, in lower-cost markets). These loans carry the highest interest rates.

The hope was that the new category of jumbo light loans would carry lower interest rates, so that people in high-cost real estate markets could more easily buy a home or refinance an existing mortgage. Alas, according to mortgage brokers, the qualifying guidelines for jumbo light loans are so difficult to meet that many people cannot get one.

Restrictive Qualification Rules. Some examples of these restrictive guidelines are:

• The Debt-to-Income Ratio must be no more than 45%. This means that your total monthly housing expenses (mortgage, home insurance, taxes, and other home related expenses) divided by your gross monthly income is less than 45%. In high-cost housing markets, where people have to spend a large portion of their income on housing, these limits may be tough to meet. Yet these high-cost housing markets are precisely where the need for jumbo light loans is greatest.
• Borrowers must submit full documentation of income and assets (which can be especially difficult for self-employed people, since the typical self-employed person can deduct a variety of expenses and show very little income at the end of the year).
• Borrowers must have a credit score of at least 700 if their LTV is greater than 80% or at least 680 if their LTV is less than 80%. This factor alone eliminates a lot of would-be borrowers.
• Borrowers cannot have made a late mortgage payment within the last 12 months. Oh well.

In addition, those who are refinancing cannot wrap a second mortgage into the new jumbo light loan. Because second mortgage holders are skittish in the present market, borrowers may have to repay a substantial percentage of their second mortgage in order to refinance the first.

Not Much Relief in Interest Rates. In addition to these restrictions, the hoped-for favorable interest rates of jumbo light loans haven’t yet materialized. Currently, the interest rates for jumbo lights range from 7% to upwards of 7.5%, not much better than rates for the regular jumbo. In contrast, the interest rates for traditional conforming loans are less than 6%.

Jumbo Light Loans May Improve in the Future. Some experts believe that it will take jumbo light loans a while to hit their stride, and once they do, interest rates may dip a bit. Some predict that for this reason, Congress may extend the planned December 31, 2008 expiration date.

Kathleen Michon, attorney & guest blogger.

With home values having recently gone down in many parts of the U.S., held steady in others, and even shown gains in a few areas, how are your supposed to know whether you’re paying the right price for a home?

We gave a lot of advice for assessing the market in our book (Nolo’s Essential Guide to Buying Your First Home) — things like going to lots of open houses, checking comparable sales prices on sites like Zillow, and asking your real estate agent to prepare a report on sales prices of comparable properties (the “comps”).

That advice still holds true — but as was recently pointed out in an article by Realtor Magazine (a professional publication), it’s especially important to pay attention to the prices of pending, rather than closed, sales, for the basic reason that they’re the most recent. (And in a falling market, the appropriate price for the house you want to buy may be even less than the most recent pending comps.)

A good real estate agent will present the prices of pending properties to you no matter the market and explain any trends. But it helps if you know what you’re looking for — and, in some cases, what to ask for.

Ilona Bray