Nolo’s Real Estate Tips for Home Buyers

Settling into your new kitchen and curious about things like whether to buy a plastic or wooden chopping board? Here's a fun quiz from the Sierra Club -- I scored pretty well, but still learned more than usually comes standard in the average "green" article.

And while we're talking green, let me throw in a tip of my own. I just painted the bedroom and was finally able to justify having saved all those old bedspreads, sheets, and towels -- you know, the ones that are too ratty to give to charity -- just like my Lithuanian refugee mother taught me. The box of rags was starting to feel like its own kind of clutter, but I was able to cover the floor and all the furniture that was too big to move out, without having to buy any tarps. Very satisfying.

For proof that complying with homeowners' association rules is important, check out this story: 60-year-old Joseph Prudente was found in contempt of court and jailed when he failed to resod his lawn, as his homeowners' association instructed.

Apparently, the Beacon Woods Civic Association didn't find Prudente's claim of financial hardship -- his adjustable rate mortgage payment had increased by $600 per month, and his car was repossessed -- to excuse him from keeping the yard up. After Prudente failed to respond to their continued demands to resod, or later to court documents, he was found in contempt of court and ordered jailed. The contempt order meant Prudente could be kept in jail until he complied with the mandate to resod the lawn, something he could not afford to do.

Prudente's case shows that if you buy a home in a common interest development, you must be prepared to live by the rules -- and you can't count on the understanding of the association when you want to deviate from them. For that reason, it's best to make sure you fully understand what you're getting into before you buy and know a little about the association's history for granting any exceptions.

Fortunately, Prudente's story ended happily: neighbors and strangers helped him resod as the association required, and he was out of jail a couple days later.

Everyone loves a sequel, right? And as authors of Nolo's Essential Guide to Buying Your First Home, we're thrilled to have just received, hot off the presses, copies of our sequel to that book: The Essential Guide for First-Time Homeowners: Maximize Your Investment and Enjoy Your New Home.

This is the manual we wish we'd had when we became homeowners. It covers everything from housewarming parties to new-found tax deductions, from maintenance to remodeling. And it's loaded with tips for economic hard times, like how to decorate on a budget, deal with your lender if you have trouble paying the mortgage, lower your homeowners' insurance payments, and even save money by going green.

You can start reading a sample chapter right now -- enjoy! And if you know anyone who's just bought a new house, think about this for a fun-yet-practical housewarming gift.

A recently-divorced couple in Cambodia decided to equally split their house -- literally. The husband came with relatives and sawed it in half, carting his share (mostly debris) away.

Fortunately, in the United States, you can avoid any such extremes even if you buy a property with someone and later decide to part ways. If you decide to buy jointly -- even if it's not with a spouse or significant other -- you can each own different percentages of the property if you hold title as tenants in common. You don't own any particular portion of the property, though, so if you want to have the right to separately use a particular portion (the upstairs unit, for example), you'll have to create a separate ownership agreement to address that.

And if you want to sell your interest, you can. But you can't saw the property in half.

Alayna Schroeder

Kudos to Nolo's own Steve Elias, who's been in the news lately, pointing out that efforts in places like Michigan to take owners of foreclosed homes off the voter rolls are not only unfair, but absurd.

Foreclosure has always been a lengthy process, and banks are now more willing than ever to work out a compromise solution, so that the idea that foreclosed homeowners just pick up and leave the moment they get the bank's foreclosure notice couldn't be more off base. For information about how foreclosure affects voting rights in each state, see http://legalconsumer.com/bankruptcy/foreclosure_voter_rights.php?. You'll find links to election rights organizations and state-specific registration information.

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.