Nolo’s Real Estate Tips for Home Buyers

I'm no math whiz, so I can sympathize with first-time home buyers  who are confused about what the hullabaloo over the federal takeover of Freddie Mac and Fannie Mae means. The details are probably more complicated than most of us can handle when thinking about factors like choosing the right house, making a good offer, and having the proper inspections.

Luckily, if you're buying a house, it isn't necessary to understand the complicated relationship of these behemouth organizations to the real estate market and Wall Street. But even if you're completely disinterested in the details, you do need to know one thing: the takeover does affect interest rates, which reached a 7-month low this week. (If you're curious, the reason this is so is explained here.)

If you're a first-time buyer, this has a huge impact: it makes your house cheaper. Okay, not literally. But while the seller's price tag doesn't change, what comes out of your pocket does. For example, if you paid a rate of 6.25% for a $300,000, 30-year fixed rated mortgage, your monthly principal and interest payment would be almost $1,850 (and you'd pay a whopping $364,974.58 in interest over that 30 years). But if your rate is 5.75% on the same mortgage, your monthly payment is only around $1,750. And you'll only end up paying $330,258.68 in interest -- no small sum, but still much less.

So while the price a seller advertises is an important factor in determining home affordability, low interest rates are nothing to scoff at, either. You have Fannie and Freddie to thank for that.

Alayna Schroeder

Nothing fits so well into your budget as something that's entirely free. And the plus side of living in a consumer society on overdrive is that people are increasingly willing to just give stuff away rather than figure out what else to do with it.

Sometimes being alert to what's on the street is enough. Even in my own, less-than-upscale neighborhood, I've picked up post-garage-sale finds ranging from clothing to file drawers to my very own Oakland A's baseball cap (I'm not a native, but I'm told it's a must-have around here.)

And the online world has added a new layer of possibilities. If you're not yet addicted, check out the free section of Craigslist. (It's there under "For Sale.") In the SF Bay Area, at least, you'll find everything from desks to dirt to dressers.

Another favorite is Freecycle, a grassroots nonprofit where members both advertise giveaways and post requests for what they need.

And for more tips and inspiration, see this September 5th USA TODAY article by Jayne O'Donnell, "If you can't afford it, then get it for free". 

Most would-be homeowners have heard of one of the primary benefits of purchasing: the tax-free gain you get when you sell. If you own and live in your house for at least two out of the five years before you sell, you do not have to pay taxes on the first $250,000 of gain from the sale ($500,000, if married and filing jointly). Most first-time buyers don't need to hear more -- their first homes are stepping stones; they don't expect to be in their homes long enough to exceed these maximums.

But be careful if your plan is to hold on to your home and rent it out -- not an uncommon strategy for many homeowners today who need to move but aren't ready to sell at the low prices dominating many real estate markets. When it comes to taxes, rental property isn't treated the same as a principal residence. You are taxed on the full gain when you sell, usually at 15% (the current federal capital gains rate for most taxpayers).

To get around this, rental property owners used to be able to convert rental properties to personal residences. If they lived there for two out of the five years before sale, they'd qualify for the principal residence exclusion. The law has changed, however. Now, the time the property is not your principal residence is considered "non-qualified use". You are only permitted to exclude gain for qualified use -- the time the property is your principal residence. So if you own a property for 10 years and only live in it for the last two before selling, you can exclude 20% of your gain and will have to pay taxes on the remaining 80%. (Non-qualified use before 2009 doesn't count, however.)

You don't need to worry about this if you don't ever plan to rent your house out. If you think you might, however, be aware of the tax implications of doing so.

Alayna Schroeder

With the foreclosure crisis and the tightening up of credit, getting a mortgage feels like it's harder than ever -- or is it? Let's take a look back in time.

Back before the Depression, home mortgages typically extended for ten years -- not the generous 30 years we're used to now -- and a down payment of 50% of the home's purchase price was expected.

Not surprisingly, this kept a lot of people out of the housing market. In 1940, only about 44% of household heads owned homes. It was only when the federal government stepped in by backing long-term mortgages, thus creating an incentive to homeownership, that the shift to the standard 30-year mortgage with lower down payments began.

The source for these fun mortgage facts? A book called Theorizing Discrimination in an Era of Contested Prejudice, by Samuel Roundfield Lucas.

If you've been waiting on the sidelines for the price of houses to hit rock bottom, you may have already missed the moment. The National Association of Realtors (NAR) just reported that existing-home sales last quarter went up from the first quarter of 2008 in 13
states.

True, most of the increase can be attributed to people who couldn't resist a super-bargain, like on foreclosed homes in Northern California and Florida. But as soon as you have willing buyers, you have competition, which tends to boost prices before too long. And in some areas of the country, prices actually rose in the last quarter -- like in the Yakima, Washington, Binghamton, New York, and Amarillo, Texas, areas.

It's really all just a reminder that timing the real estate market can be harder than it looks. For all the external economic indicators playing a role (unemployment, mortgage interest rates), the final piece of the puzzle is buyer psychology, and when enough homebuyers decide they want in on the market, it can change in an instant.

That takes us right back to the strategy we've always recommended: Look for the house you want to live in for a long time, in a neighborhood where home values tend to remain stable, and at a price that won't have you begging your bank for a break in a few years. Then enjoy it, even if prices go down in the short term, knowing you've got a solid long-term investment.

Ilona Bray

A recent article on Inman News reports that a survey published by Zillow, an online real estate valuation company, shows that a majority of homeowners are unrealistic about the true value of their homes. According to the survey, even though about 73% of homes lost value in the last year, 62% of homeowning respondents said they believed the price of their home had held steady or gone up. These homeowners are unrealistically optimistic about the future, too, with 75% expecting an increase or level value for the next six months, even while 42% expect values in their market to drop.

Why the disparity between reality and perception? One reason is probably a stubborn disbelief that it's possible for the real estate market to fall, especially given the frenzied pace with which values were increasing just a few short years ago. Conventional wisdom says that home values rise over time -- which is historically true -- but "wisdom" just a few years ago told us time or investment wasn't needed, and home values always rise. (If you disagree, try counting the number of television shows and books on flipping properties.)

Probably an even greater misperception -- given the number of people who think the value of their home will rise even while the local market falls -- is that homeowners think their properties are better and different than the rest. They can't imagine anyone wouldn't love what they've done with the kitchen, or ooh and ahh over the new deck.

But the sad reality, as any homebuyer knows, is that houses are commodities. Buyers aren't looking for someone else's dream home, they're looking for something that meets their needs at a reasonable price, and they're not willing to pay the premium many sellers expect for their own customization or improvements. (Often, whether such "improvements" even improve is questionable -- pet showers, anyone?) After all, if they don't like the seller's choice of custom cabinetry or bathroom tile, they can easily find another property without these features -- and not be expected to pay for them.

Alayna Schroeder

Read the news lately? Before you get too excited about the $7,500 tax credit for first-time home buyers included in the recent housing bailout legislation, take note of one very important thing: You have to pay it back. In fact, you don't even get to wait until your house is sold to pay it back -- the feds will claim it in installment payments in subsequent years of your tax payments.

That's no typical tax credit -- it's more like an interest-free loan. For details, see Sandra Block's excellent description in USA TODAY.

Ilona Bray

I recently came across an entertaining website from the National Association of Realtors® at www.housingmarketfacts.com. I will admit that I was originally drawn to it because I was expecting to find lots of statistics and predictions about market conditions, which I love, in part just because I can reflect, "Wow, there are really that many people looking to buy a house with 8 bathrooms?" or later look back and say, "Were they wrong about that!" And while the NAR has a wealth of statistics and predictions, this site was mostly a gateway to specific parts of the organization's official site, designed specifically for people who are thinking about buying. (It's more entertaining than the regular NAR website, though, since you're welcomed by a Princess Leia-like character... and by that I mean the little hologram projected by R2-D2.)

But not to be distracted. While elsewhere I'm hearing the housing market just took the biggest drop in two decades, the NAR is trying to convince me of the wealth-building value of buying a home. It seems like a tough sell (no pun intended), and it reminded me of something important first-time buyers should consider: when relying on information, consider your source. 

By no means am I saying that the NAR isn't a reputable source. But, as a first-time buyer, you should definitely look deeper before deciding when and where to buy and whether you'll build wealth in the process. One is that markets are very local. Values fluctuate within a county, city, or sometimes block. Another is that markets right now are volatile. Things can change quickly; any national organization compiling statistics can't keep up with the pace.

I agree with the NAR -- over the long term, most houses appreciate and help buyers build wealth. But whether, when, and by how much are all dependent on specifics. You can find the details in your market by checking comparable sales, evaluating sales history and growth, talking to local professionals, and keeping an eye on the amount of inventory in the market and how long it's sitting around.

And if you want a statistic to justify your decision to either buy or wait, jump on the internet. I'm sure you'll find it somewhere.

Alayna Schroeder

I complain sometimes about the lack of storage space in my little house, but I confess, it puts a handy brake on my desires to accumulate. Otherwise, I might end up fitting the profile revealed on MSN.com recently: The average U.S. home has grown from 1,400 square feet in 1970 to 2,300 square feet today.

Meanwhile, average household size has shrunk from 3.1 to 2.5. In 1995, one in 17 U.S. households rented storage space. By 2007, that was up to one in ten, according to the Self Storage Association. The bottom line: Most Americans are buying so much stuff it doesn't even fit into our bloated houses!

I have to say, except for unusual instances (kids want the bed for their first apartment after college, etc.), I often wonder what the point is of paying to tuck possessions away in storage facilities where you never see them. If the possessions aren't worth much, the storage costs will eventually dwarf the costs of replacing them.

If they are worth a lot, they'll be more susceptible to loss in some out-of-the-way storage locker. My neighbor stopped by recently, distraught, because her storage space was broken into and they'd stolen some heirloom china from her mother. The owner basically shrugged his shoulders and said they'd been having problems with break-ins lately.

So if you're about to buy a house, take this as encouragement to have a big garage sale before you go. It's a great way to meet the neighbors, reduce the stuff you have to move, and make sure you fit comfortably into your new digs.

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