John Beckett's Real Estate Blog

Purchasing a home is a stressful experience, both because it’s a huge monetary investment and because the buying process can be complicated and confusing. Buyers must be well-informed and have a good understanding of a property’s underlying value before making a decision to purchase. Once buyers select a residence that meets their personal and financial criteria, it is important to remain diligent until the property closes. Buyers should not let the home of their dreams escape over minor differences during the buying and negotiating processes. Here are some of the minor roadblocks you should recognize to keep them from ruining your dream-home purchase.

Aesthetics

Prospective buyers should not let minor aesthetic differences hinder their big-picture view of their dream house. If appliances or the decorative theme are not up to your expectations, keep in mind that most of these things can be easily modified. Instead of focusing on the way the home’s interior is decorated, check for overall structural soundness and try to focus on potential. How do you do this? A good strategy is to secure a licensed home inspector prior to closing on your deal. The inspector will provide a detailed analysis and cost breakdown on actual required repairs. Depending upon which state you reside in, the home inspection can be part of the actual contract. The home inspector will assess every aspect of the home’s interior and exterior. The inspection findings may be used as legal leverage in the homebuying process. If the cost of repairs exceeds a preset dollar amount, the contract can be revoked if that is explicitly stated in your contract. For example, if the home inspection requires $8,000 worth of repairs for “structural soundness,” but your contract states that you will not purchase the home unless repairs are below $1,000, you have legal recourse for getting out of the deal. Typically, you are responsible for the nonrefundable cost of the inspection, but most people are willing to incur that cost in order to save thousands of dollars down the road. The idea here is to focus more on the integrity of the home itself as a first step rather than your distaste for the current interior design or décor.

Sweat equity

Buyers should not get discouraged if a potential dream home requires some old-fashioned manual labor to get it up to their standards. Real-estate professionals refer to this as sweat equity: a time investment by the buyer to clean, redo and repair the property once the purchase is complete. Rarely are homes purchased that require no effort on your part. New construction is perhaps an exception, but a poor real-estate market can be littered with short sales and foreclosures, many of which are neglected, vacant properties. Also, many purchases are older properties with excellent construction characteristics that need some elbow grease. Similar to the aesthetic differences mentioned above, taking advantage of resources such as a licensed real-estate agent or family and friends is a good first step. Agents are likely to point out things that can be accomplished by the typical homebuyer versus those things that would be better served with professional assistance or advice.

Financial differences of $5,000

Although $5,000 is not a trivial amount of money, it’s an amount that should not interfere with purchasing your dream home. You and your real-estate agent have done your due diligence and research and put together a market analysis of the property you are interested in. You have done your part to minimize your price risk, but now that it’s time to make a deal, there is not an agreed-upon price. So, where can you find anywhere between $5,000 and $10,000 to make your transaction successful? Look into government incentives for homebuyers. Such incentives may be used for down-payment assistance, which could essentially cover your price difference. Check with your mortgage broker and get a quote on how much a buydown of one point would cost. It will likely not be enough to cover a $5,000 to $10,000 deficit immediately, but over a 30-year period will save thousands of dollars. Remember that purchasing a home is a long-term investment. Remain patient and diligent and don’t let minor repairs or a squabble over a small price difference ruin your experience.

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The question this week was how home values are determined, so here are a few ways to estimate a homes value:

BPO: Broker Price Opinion

CMA: Comparative Market Analysis

Appraisal: 1).  A ”defensible” and carefully documented opinion of value most commonly derived using recent sales of comparable properties by a licensed, professional appraiser. 2).   A statement of value or estimation of the value of a property as of a certain date conducted by a disinterested person with suitable qualifications.  Generally, value for single family properties is based upon a review of recent market activity using sales of comparable properties as a basis and then making value adjustments based upon the comparison of comparable property to the subject property.

Value Analysis: The estimation of the present worth of the future benefits to be derived from a investment in property.

If you’re thinking about investing in a rental property, experts say low home prices combined with low interest rates make this the best time in years to become a real-estate investor. What’s more, the real-estate market is starting to recover: U.S. houses lost $489 billion in value during the first 11 months of 2009, but that was significantly lower than the $3.6 trillion lost during 2008, according to real-estate website Zillow.com. We haven’t seen home prices this low in so many years, coupled with the rates being so low. When the money is cheap to borrow and the houses are cheap to buy, it’s absolutely the best time to invest. While the timing may be right, these five tips can help first-time investors take advantage of what might be the opportunity of a lifetime.

Know your options. Since not all investment properties are the same, it’s important to determine what type of property fits your strategy. Do you want to become a landlord, or would you rather restore and resell properties? Are you interested in apartment buildings and other commercial real estate, or in buying land that can be developed? First-time real-estate investors may want to start with residential housing, since commercial real estate and land development still face challenging market conditions.

Partner with experience. First-time investors should find a real-estate agent experienced in investment property deals who can help you locate promising properties. Look for relational brokers who expect to do business with you again and therefore are going to be much more careful with what they recommend. A second option is to collaborate with a more experienced real-estate investor and close a deal together. In this economy, an experienced real-estate investor may be willing to work with you in exchange for the capital you can provide, giving you the opportunity to glean investment knowledge and experience firsthand. Even if you don’t collaborate with other real-estate investors, talk to them about pitfalls they’ve experienced. Go down to the general district court in your area and listen to some landlord/tenant cases so you can get a sense of what kind of challenges landlords face.

Look for the right location. If you buy a property with hopes of renting it out, location is key. Homes in high-rent or highly populated areas are ideal; stay away from rural areas where there are fewer people and a small pool of potential renters. Also, look for homes with multiple bedrooms and bathrooms in neighborhoods that have a low crime rate. Renters gravitate to a safe neighborhood, and if they have kids, they will want a good school district. Also think about potential selling points for your property. If it’s near public transportation, shopping malls or other amenities, it will attract renters, as well as potential buyers if you decide to sell later. The more you have to offer, the more likely you are to please potential renters.

Have capital lined up. Speak to potential lenders or even a financial planner about whether you have enough assets to handle the ups and downs that could come with investing. Even if you plan to rent out the property, count on paying the mortgage whenever there’s a vacancy. If you can have about six months of mortgage payments saved up, it’s there if you need it, and you can use that money for repairs. Even if you’re planning to fix up a home and sell it, you may end up holding onto it for several months in the current market.

Build a supporting cast. Don’t wait until a rental property needs repairs to find someone to handle them. Line up maintenance individuals who can take care of the different challenges that occur so you can simply call the person when a particular issue comes up. Other sources you may want to have relationships with are an attorney to consult with on tenant issues, a property management firm to handle the day-to-day rental affairs and an accountant to help you understand the tax ramifications of investing. The more support you have, the better you will be able to handle the problems that come your way. Whatever you do, understand that buying investment property is an entirely different experience than buying your primary residence. When you go to buy your own home, you usually have emotions in it. When you go to buy an investment property, you need to put all that aside and ask, ‘What makes sense?’

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Foreclosure is a fairly well-understood process, but as “short sale” signs sprout like weeds, you may wonder what they are all about. When a lender agrees to accept a mortgage payoff amount that is less than what is owed in order to facilitate a sale of the property by a financially distressed owner, it’s called a short sale. The lender forgives the remaining balance of the loan.

Identify potential short sales: Locate pre-foreclosures in your area. You can use an online database, search courthouse listings and legal ads or use an experienced real-estate agent as a buyer’s agent. First, try to determine how much is owed on the house in relation to its approximate value. If it seems high, it’s a good candidate because it indicates the seller might have trouble selling it for enough to satisfy the loan. Pass on those in which the owner has a lot of equity in the home — the lender likely will prefer to foreclose and resell closer to the market price.

View the property: Gauge its condition and come up with a rough estimate of how much it’s going to take to repair or renovate. If it needs work, many “normal” buyers won’t consider it, which is good for you.

Do your research: What is the property worth? What’s the profit potential? If you’re an investor or even a homeowner planning to live in the home a short time, you’ll want to profit from the deal.

Find all liens and mortgages: Ask the seller or his agent what liens are on the property, and which lender is the primary lien holder.

Figure out the financing: This is critical. You have to know how you’re going to pay for the property. If you’re a good credit risk, the existing lender may be willing to give you a loan. Since it already has a lot of your information in the short-sale paperwork, it may be able to expedite the loan application process. It’s important to understand that in a short sale, you have to be able to move quickly. Once an agreement is worked out, it is common for the lender to require closing in as few as 45 days. This is too late to start shopping for a mortgage.

Negotiate: It’s not uncommon for the lender to reject your offer or to come back with a counteroffer. As with any real-estate transaction, you should figure out beforehand what your absolute highest limit is, and don’t be afraid to walk away if the lender won’t meet your figure.

Seal the deal: Once you’ve reached an agreement that all three parties — you, the seller and the lender — are OK with, get everything in writing and officially recorded. Make sure the seller understands all of the terms of the deal. Next comes the closing and the property is yours.

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So you’re thinking about selling your house. But how much do you really know about negotiating a home’s sale? Jump into this unprepared and you could leave thousands of dollars — maybe tens of thousands — on the table. You need to go back to school briefly and become a student of the fine art of negotiation. But how does a home seller get smart fast? You need the crib sheet, with negotiation tips you can use throughout the home-selling process, as taught by some of the savviest and most experienced real-estate teachers. And don’t worry — no one’s going to call you to the principal’s office for keeping this cheat sheet close at hand.

As you’re getting started
Smart negotiating starts early — even before you’ve gotten an offer from a buyer, the experts say. In fact, it starts when you choose a real-estate agent.

Beware the “Mr. Nice Guy” agent. When deciding upon a real-estate agent, you want an agent who represents you to be hard-nosed, irritating and determined; to have learned his or her business in the backrooms; and to tell it like it is and get what he or she goes after. You want the other guy to have the ‘nice’ agent. The lesson: Don’t choose just on personality, but effectiveness.

Understand “forward pricing.” When pricing your home — the first step in the negotiation process — “don’t simply take what the last home in the neighborhood sold for and make that your price. Instead, use forward pricing: If homes in your area are appreciating by, say, 10% annually, and the last comparable home sold six months ago for $300,000, then yours should be priced at $315,000 (half of 10% of $300,000 equals $15,000, which is the amount that should be added to “forward price” for this home).  That’s pricing it forward to the current market.

Once the offers start coming in
Stay out of it. Though the occasional homeowner will feel expert enough at negotiations to handle the sale of the home himself, experts generally say it’s wiser if homeowners stay out of sight during the negotiation process and let their agent do all the talking. That doesn’t mean you don’t play an active role — but you stay behind the scenes. You definitely need to not be seen. It needs to be the agents battling it out.

Get the conversation started. Let’s say you put your home up for sale at $300,000, and a would-be buyer offers $200,000. It’s tempting to just dismiss the offer out-of-hand. Don’t do it. If someone comes in at $200,000 on a $300,000 home, You come back at $290,000. Make some movement. Get the conversation started. By moving — a little bit — you send a signal that you’re willing to negotiate, but you’re not desperate. And that frequently will get the would-be buyer to play ball and counter with a more serious offer.

Remember, it isn’t personal. Lots of times the first offer from a buyer will be a lowball offer — just testing the waters. Let’s say it was offered at $300,000 and they offer $210,000 — some ridiculous amount. Well, the seller gets insulted. The worst thing that can happen in a negotiation is that you take things personal. Remember: It’s just business.

Keep it moving. Time is a key element of negotiation. The longer you can keep someone at the negotiating table, the more likely you’re going to come to a conclusion that’s satisfactory to you. Why? Because the more time and effort people invest, the more they feel invested in getting the deal done and buying your property. So what to do? No matter how bad the offer is, always make a counteroffer – and always give a concession — maybe it can’t always be on price, but maybe it can be on financing. Or, maybe there’s something in the property the buyer wants (that can be thrown in as a concession). … Just the act of keeping it going, keeping the deal alive, actually helps make the deal. One psychological tip: If you’re going to counter (offer), it’s usually a good idea to make the counter on the same document as the original offer. When the counter is on the same document, even though the other party knows that his or her original offer was rejected, it makes it seem like the same deal is still being negotiated.

As the negotiation continues (or drags on). Don’t split the difference. It might be tempting to make a deal happen by just saying, ‘Let’s split the difference between offer and counter offer.” Don’t do it. Why not? Because you’re being too generous, and you’re leaving money on the table.

A small concession can be big at the end. As you’re getting close to closing a deal, but you’re still not there, consider giving a small concession near the final moment. The concession could be moving back the closing date a week, or leaving a piece of patio furniture that the buyer admired. Why? The other side’s need to think they’ve “won” the negotiation, this may be what’s holding up the deal … so throwing them a small win can seal the larger victory. Because timing (of the concession) is more important than the size of the concession, the concession can be ridiculously small and still be effective.

And there you have it — a crib sheet that ensures the only thing that won’t be cheated the next time you sell a home is you.

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