Tuesday, September 14, 2010

So you want to buy a house ?!!

If you like me who loves to research online, hate paying unnecessary fees & have the passion of going to the bottom of anything you spend a dime on, this post might be useful for you.

Just to warn you though, you might find this blog negatively toned as I love to challenge standard practices :) Also I love giving clear-cut opinions, so that's what u will find here. But again, they are MY opinion, one buyer to other. Take it accordingly.

Should you buy now & buy here ??
As almost every other person would have told you so far,  its TOTALLY & ONLY your decision. But a few months financial preparations helps. During this period, I :

  • Would start with pulling out my free credit reports from government sponsored site : AnnualCreditReport.com & take corrective actions for any items negatively impacting your credit .
  • Would stop applying or even inquiring for ANY types of loans, credit cards even bank accounts.
  • Wouldn't' cancel any credit card or payoff any loans if I don't' need to.
  • Would consolidate all my savings into one account. Unnecessary transfers of money appearing in  last 2 months financial statements would generate unnecessary questions from your loan officer.

MLS vs. FSBO listings
Before you even choose your real-estate agent, this question is worth pondering. If there are plenty of FSBO listings in your area with very competitive prices why bother looking for an agent and buying an MLS listing house. Its after all , you, who pays for all the commissions.

But unless things changes drastically, FSBO listings are generally a waste of time. Everyone thinks their house is the best property in the market and their price shows that. Don't' worry, you will do that too one day :) And without any agent in picture, who is there to make them realize the ground reality ?!
So, I wouldn't' waste my time beyond a very quick research to see if there is indeed any good FSBO listing.

Choosing your Real estate agent
This is definitely very important decision but NOT the most important decision. Most important decisions will be the one like whether you should buy a particular house and if so, then for how much. And believe me, you will be all alone struggling with that decision :) So if someone is scaring u about the choice of an agent, don't be. What I would look or not look for are:
  1. Does he/she has good experience in local market, say about 5-10 yrs .
  2. Does he/she has LOTS of experience and keeps bragging about it ?! Stay away from such person, Trust me on this one. He will buy you his dream-house with your money. And you can't argue with him. He has so many war stories ranging all the way from great depression to prove you wrong. He can talk his heart out, throw so many jargon, explain the complex financial market in easy language, and you will be just mesmerized ready to sign wherever he suggests :) Seriously, stay away from such guys.
  3. Try to avoid someone who throws in 'I work hard for my money' as well. For the types this article is for, you will be probably working harder than your agent. So why to deal with someone who has pre-established notion that they work harder than you, right ?! Believe me when they say such things, there is a purpose; read on.
  4. Try to find someone who refunds you part of commissions. Someone of above type, wont. Someone from a big Realtor company, wont' as well.
  5. Why, you should expect some commissions back ? Because you will find yourself working at least equally diligently then the agent. With so many information online, can you avoid the temptations of not finding out more details of the property yourself which would be probably one of your biggest financial decisions ?!
  6. Try to avoid those who sit on their A** and do nothing because they refund you the commissions as well. Believe me there are agents, good hard working agents, who fall in between i.e. they work and they refund part of their commissions, they know the market and guess what, their egos are in-check as well :)

Regular vs Short-sale vs. Foreclosure Sale
No brainer I think. wherever you get the greater value. And you should get greater value in the last 2 categories I think. Regular sale wont' play low-ball with you. The only downside for the foreclosures are that they generally have damage to the house and your bank wont' finance you so easily to get the house fixed before you move in. So you might have to come up that money from your savings for down payment.

So you found a house..
How much you should offer ?! If  the number you thought about feels like an insult to the offer, probably that's the right number. Yep, I love playing low-balls. That's what this article is all about. In today's' market giving an offer say 10-15% lower than the listing price is very common unless you buying a very hot property. And you shouldn't' be reading this article, trying to cut corners, if you buying a hot property :)

Other way to come out with the number is ask what your agent think will give you say 75% chance of getting the house. He will probably give u a number little less than the listing price. Having known that number, ask him again if you don't' absolutely need to get the house unless its a steal, what number he thinks you should bid. He will come out with other lower number. Bid a little lower than even that number :)

Writing a contract..
unlike some countries where a legal document is essentially an approved & printed form which you can't edit, in most of the states in US you should be able to edit the contract either on the contract itself or through an addendum and can sign (& get signed by other party) to make it legal. So read the contract knowing the availability of this tool in your armor. I would pay particular attentions to:
  1. Home inspection dates: when you need to get the home inspections and can you simply walk out if you don't LIKE the inspection report. The home inspection due date should be as late as possible so as to give you any third party approval etc. For example you  buying a short sale property and if the contract says that you need to get home inspected within 10 days of contract ratified. Guess what, you might not get the selling bank approval by 10 days of contract ratification. So, why spend $400 to get the home inspected when u don't' even know if the sale is final yet. So, go ahead and change the contract as it suits you the best. The seller will come back if you skewed the contract too much. but it will save your interest later, hence worth trying.
  2. Is radon/termite inspection etc. covered ? 
  3. What are the arbitration process ?
  4. Can you just walk out later without needing any arbitration and if so how much of down-payment you will loose ?
  5. What's the minimum down-payment that will get you going ? I know they all ask for an hefty deposit but if there is no offer on the house since last 2 months, wont' just $2000 will do it ? Ask your agent.
  6. Seller's closing cost help: This helps you in reducing the amount you need to bring at the table. But don't just put a very big number here. The lending bank might not approve it. They are very restrict these days. And if they don't' approve it, you will simply loose that amount. Example, suppose while buying a $400K house, u wanted $20K closing cost help. The seller agrees but then the bank at the final stage, may be on the day of closing comes back and says the max help you can get is only 3% ie 12K and that too can only be applied towards the closing cost. You risk loosing the additional $8K free money from seller. And on top of that, if your total closing cost comes out to be say $10K only, you will loose additional $2K as well. So,
    • do some good estimates of closing cost number first
    • find out typically what's the max seller's help allowed by your favorite bank. you wont' want to switch to some crappy bank just because they permit higher seller's help
    • adjust your offer & sellers' help amount accordingly.
  7. Any chance the seller can pay all the transfer taxes (in Maryland, the form has that option) ? No harm signing it in front of the options that says so and seeing if seller agrees.
Finding a loan FHA vs Conventional
If you can't afford to pay more than 3.5% of the offer price as down-payment, this is a no brainer. FHA is the answer. if you can pay at least 10%, look into both.

The biggest downside of FHA loan is the upfront portion of mortgage insurance. Here if your loan officer asks you not to worry about the this amount as it can be rolled into the loan amount, look for another loan officer. He has just given you the WORST advise. Actually the same is true even for conventional loan's PMI i.e. if someone suggests that this amount can be rolled into the loan and your per month mortgage goes up just by few dollars, reducing you an hefty down-payment, he is not highlighting that you just assumed a huge few thousands additional loan which is difficult to get back from the mortgage insurance company if you refinance or resale. And this amount was unnecessary for conventional loan (for FHA it's a must). So, your loan officer should explain you the downside of such roll-ups as well.

Loan Product & Rate
You probably already know enough about this and have made up your mind if to go for ARM vs fixed depending upon how long you want to live in the house. Few things though about ARM are:
  • Once the initial rate expires, does the rate changes yearly ? (if so, you are taking more chances. Believe it or not, their are financial institutions which would give you say 7/7 ARM meaning after the initial period of 7 year, the rate will change once for another seven years, meaning less chances of dealing with turmoil).
  • What are the initial , yearly and lifelong cap of rate changes. A 2%, 2%,5% is a good rate a 5%,2%,5% is a bad rate. A simple search would reveal what I am talking about.
  • Bank Fees:  Believe me you can negotiate on this one too. They might not agree to but if someone is scoffing at this idea, he is probably benefiting from your loan
  • Interest rate: This is definitely open for negotiation and is most important to negotiate till your heart's content. use all your negotiations skill to bring this down. From private loan officer to country's biggest lender's well published rate, everything is open for negotiation. If your score is really good, they will like to earn your business. Don't expect a lot, but they can give you 1/8 to 1/4% less without bumping up the fees and points.
  • Points: a lot is already available online when to pay or not pay for points. Use some calculators/tools to come to this decision for your individual case.

Settlement fees
These fees are several parts & as your loan officer will probably project you, very few parts have any leeway for negotiations. WRONG. Apart from the transfer tax or property tax most of the other fees are worth investigating for. I would start with the settlement companies fees.

  1. In most state you have the right to choose your own settlement companies. So start with getting a quote from few companies from the Google search or yellow pages. And then see if the company your Realtor suggests or the seller "strongly" recommends can match the rate. If not, then simply refuse, quoting the above right ;)
  2. After getting the best possible quote, see if you can further cut down on few fees to reduce it even further. Examples are
    • Owner Title Insurance : if you buying a kinda straightforward property which is not very old, not lots of sale/resales in the past, is in fairly good neighborhood with very few fraud cases around, originally a builder developed property and not a sole house on someones ancestor's land from generations, you probably don't need this insurance not matter how much folks around you scare you and no matter what u find online. Most of the searches online on this topic reveals that the people benefiting from this excessive fees are the ones who respond to questions regarding title insurance online, skewing the answers. No wonder the payout rate of this claim is about 4%, one of the lowest in insurance world.
    • Land survey: Find out if your bank needs this and if you can get the one from the seller that you can use. If so, ask your settlement company to exclude this service.
    • Pest control:  you might get a better deal to get this done during home inspection. And if you did that, tell your settlement company that you already have the report & they shouldn't order a new one.
  3. I wouldn't' argue about other individual fees of the settlement company as they try to convince you that they really earn those fees, say charging you $50 for wiring even if the wiring costs them only $10. Simply ask them to match the best rates you got elsewhere.
  4. No matter what companies you suggest, make sure that they have bunch of attorneys who does or oversee the title works & do follow the laws strictly .
  5. Talk to them yourself rather than going thru your agent, even if its your agent's recommended companies. That way you can ask them if they will send you all reports directly. You wont' want them to charge you for say land survey without actually getting it done, would u ?

Front Foot Fee
Your settlement companies will probably just assume that you want to pay a high annual fee, if u have this fee there, rather than paying it off.  So find out what is the pay off balance and if you can just pay it off. If you have couple of years left on the Front foot charges paying it off might be good idea. Similarly. who knows, may be the seller has already paid it off but the utility company or municipality hasn't updated the record. So worth inquiring about.

Government related tax:
I know you can't negotiate on these but no harm checking if they have been calculated correctly. If you are a first time home buyer, you might get a break in these fees or there are few fees that only seller is supposed to pay, so ensure that its done that way. If seller has agreed to pay all the transfer taxes (it should be so stated in contract, read above), you shouldn't' be paying these fees then.
Also check if the property tax is calculated based upon the settlement date correctly.

Insist on  getting the final settlement details (HUD final) as soon as possible from the settlement company. They tend to delay it but if you got it early you will have time to cross-check & question those numbers.

Settlement Day:
Everything will be settled one way or the other, so don't' worry too much raising your heart beats :) Its a pay day for everyone except you, so they will come out with solutions for every problem, artificial or otherwise . So if you see some genuine concern, raise it rather than try to accept it because you had a long day. You have been in the market for too long, what's in for an extra hour or two :)

Good luck.. Keep researching..

As written above, this is summary of my research; advice from one buyer to other. No responsibility is assumed; implied or non-implied.


  1. Very good description...

    few more things ..

    1. Get few contractors to come out and look at the property and give you quote on things you want to fix/upgrade to understand cost.

    2. Learn about the codes and permits. Make sure you understand the upgrades the seller did were with permits or not. Once you own it you are labile to the permitted work done. Generally you can check the city's website for the permits pulled for a property. Or you can just go to city office.

    3. If it is older property check that it is connected to city sewage and not septic tank. You will be surprised how much it cost to connect it to city line.

    4. Check for asbestos/lead content in house. Specially older houses have these and in some states law forbids general contractors to even touch such houses. They need to be specially handled.

    5. Some understanding of the house basics will help you a lot. So you have meaningful conversation with the inspectors and contractors and to be able to judge how good/bad something is in the house.

    I want to add more but I am not a bus to NY and my boss wont like me doing this at work ..:)

  2. Good additions "Monk" !!

    Regarding city sewage/septic tank, don't forget to consider the "front foot fee" described above while doing the comparison.

    With the huge front foot fee I pay every year I wish we had a septic connection.

  3. Great ...especially for first time buyer.......few things are purely theoretical...but if things favor...