October 2007 Archives

October 31, 2007

Buying a House ... For Your College Student?

When I graduated high school, it was a big deal if your parents bought you a new car as a graduation gift. Most of us were happy to get our own electric typewriter (this was in the prehistoric age). Well, many parents have upped the ante lately, and buy a house or condo for their college-bound children.

According to a recent article, "College Area Properties Get Good Grades," by Jay MacDonald on Bankrate.com, about three million properties have been purchased for college students in total. Student-owned condos are becoming so popular, there's even a name for them -- "kiddie condos."

Parents (especially of children going to college in major cities with housing shortages) point to a multitude of financial benefits. There's the potential for home appreciation, even within the four (or more) years it takes the child to finish college (college towns rarely have huge real estate slumps). There are tax deductions associated with home ownership. And then there's the fact that the parents would have spent $5-10,000 per year on campus housing or an apartment rental anyway. In some cases, there may also be tuition savings (home ownership may establish residency that qualifies an out-of-state resident for lower tuition at a state college; but usually there are a lot of hoops to jump through to establish residency). What's more, parents who put their college student's name on the deed as co-owner of the property help their child build up their credit history.

Beyond the financial considerations, many parents like the idea that their child has a nicer place and neighborhood to live in, with more amenities, such as a private bath or covered parking. They're just saying no to noisy cinderblock dorms.

But don't start shopping quite yet. Even if you can afford to buy a $200,000 condo or a $500,000 house for your college student kids (factoring in all the usual costs such as property taxes and insurance and condo association fees), buying might not be the wisest move -- particularly if campus housing is relatively cheap and plentiful. Here are some issues to consider:

How responsible is your child? And how much do you want to take on the role of landlord? Unless you're buying a studio apartment for one, it's likely your college student will have roommates. To protect your investment, you'll want all roommates to sign a lease, pay a security deposit, and take good care of the property -- not use it as party central for all their friends from the (officially) "dry" dorms.

Even if your child is the only tenant, you'll want him or her to keep the place in good shape and not disturb the neighbors with loud parties. (And if they're in a condo, the walls are likely to be a lot thinner than in a detached house.)

If the college is far from your home, you won't even be able to stop by and check things out occasionally. (Not that you'd necessarily be welcome!) If your son or daughter's room at home usually looks like a hurricane just hit, don't expect them to suddenly become happy homemakers who dust and vacuum regularly (let alone scrub the bathroom floors and clean out the refrigerator).

Is the property a good investment? Assuming your child finishes college in four or five years and moves away from the college town, do you anticipate that property values will appreciate and that you will be able to sell after graduation? And what if the child transfers after a few years or does a junior year abroad? Or worse, drops out and moves away from the area (possibly back home)? Do you want to continue playing landlord to other college students (maybe moving up to professors)? Or is the place in a great vacation area or near close relatives so that you can use it as a second home?

Finally, what will your child lose by living in a house other than a dorm, frat house, or apartment? There's a lot to be said for experiencing communal living, either on campus or off. Your child will learn to live with all kinds of people, deal with a landlord or resident hall adviser, manage money, and pay bills--all without mom or dad involved (unless of course you're one of those "helicopter" parents, hovering nearby).

While not always pleasant (most of us can remember at least a few obnoxious dorm-mates, noisy apartment neighbors, vermin-infested apartments, and horrible landlords), there's something to be said for the character-building aspects of living in student housing or a campus rental. Becoming independent and dealing with all the pros and cons of the real world (not the MTV one) can even convince your child to work harder in school so as to afford something better later! And there's nothing like student housing to forge bonds of friendship. One of my closest college friends and I still laugh about the dumpy apartment we lived in above a pet store and the day the monkey escaped... but hey, that's another story.

To help your college-age student learn all about what goes into the purchase of real estate -- and, by extension, what Mom & Dad have to do to get them their hoped-for new condo -- buy them a copy of Nolo's Essential Guide to Buying Your First Home (Nolo) for summer reading.

Marcia Stewart

October 21, 2007

FTC Warns Against Deceptive Mortgage Ads

Like many homeowners, I get frequent, important looking letters in the mail, filled with bold and italicized print and exclamation marks, telling me that I'm paying way too much for a mortgage and promising a radical reduction in my monthly payment if I refinance! Usually, I just resentfully shred these letters (the wasted paper!), but when I do peruse them, I usually see their limits: a low interest rate that only lasts one month, or artificially high fees.

Good thing I'm quite happy with the mortgage I've got. But the same sort of misleading hype gets directed at people looking to buy their first home, some of whom are naively grateful for a mortgage that will "help" them. You've heard the ads: "We specialize in bad credit!" or "We're the friendly ones!" The recent subprime mortgage crisis hasn't slowed these folks down one bit.

Don't believe the ads - at least, not without follow-up. Many homeowners now in dire financial condition got there because they didn't understand the terms of their mortgage. Some were misled; others just neglected to read the fine print. Fortunately, you can avoid this. The Federal Trade Commission recently released a plain English explanation of how to interpret deceptive mortgage ads. Every consumer getting a mortgage--or needing to refinance--should understand the terms it discusses. Here are a few other tips:

Get it in writing. Talk is cheap. If someone verbally promises you favorable loan terms based on what's in an ad, they shouldn't have a problem backing them up in writing.

Customize the package. Sometimes great loan terms are legitimate--but the lender will tell you that you don't qualify because you're not the "A+" borrower. Often that means your credit score isn't sky high. Make sure you know what the terms of any mortgage will be for your specific situation. (The best way, of course, is to get preapproved.)

Do your own comparison. With the easy accessibility of loan comparisons online, you don't have a good reason not to compare the seemingly amazing offer to what's already out there. And if the "too good to be true" offer seems worlds better than anything out there, it probably is too good to be true.

Don't sign anything you don't understand. Don't back down, even if someone is waiting and pressuring you, or says the issue isn't important. Just remember--they're not paying your mortgage, but if you sign without understanding, you will be.

Personally, I can't help but wish for more extreme measures against these deceptive letter writers. For example, there's a whole slew of people dedicated to catching African scam artists who send fraudulent letters promising riches if the recipient will send just a few thousand dollars first. (Though, I must admit, I do enjoy watching the videos these scam-baiters have manipulated these trusting folks into making.) While most of us can easily recognize these scams and have all been warned to avoid them, homeowners haven't always received the same help when deceived by deceptive mortgage ads. Thankfully, the FTC is doing something about that too, sending warning letters about potentially deceptive ads to over 200 mortgage companies.

To learn more about how to clean up your credit before you apply for mortgages, read Attorney Robin Leonard's Credit Repair (Nolo), now in its 8th edition.

Alayna Schroeder

October 19, 2007

Full-Service Movers: For When You Know You've Grown Up

I've always been stuck in the poor-student mindset when planning a move: I invite a bunch of friends with pickups, tax their strength, and risk grave bodily injury maneuvering boxes and furniture, then pick up Chinese takeout for the exhausted (but proud) group afterwards.

So I was impressed when two of my friends (I'll call them K and L) decided to take theBoxes grown-up approach and hire a moving company to take care of the whole deal. The movers boxed up their possessions (right down to the Q-tips in the drawers), professionally padded any fragile items, shrink-wrapped furniture that could be scratched, loaded everything onto the truck, and delivered it all to the proper rooms of K and L's new home.

Of course, full-service movers cost more. Our friends didn't have much of a choice, what with two boys under the age of four running around their household. But having watched the process, I can see where the cost might be worth it for anyone.

As L said to me, "These guys are so efficient, I'm sorry I wasted time trying to pack any of my boxes!" And the truck loading was a sight to bring out all the neighbors. The moving guys (I think I counted five of them) looked like they spend their spare time weight training. I'm tempted to  say they balanced couches and dressers on one hand, but though they didn't quite manage that, it wouldn't be a huge exaggeration. The only near-mishap came when one guy spotted a spider on the large potted plant in his arms (I guess large biceps are no protection against arachnophobia).

And I visited K and L right after the move, as they cheerfully unpacked boxes, showing no signs of the sweaty brows and sore elbows that I associate with a recent move.

Just one caution: A few days later, they still couldn't find their cutlery. Turns out it was still in a drawer back at their first house. So make sure to do a final walk-through before the truck takes off! And to learn more about how to stay sane while you move, and other tips for a smooth relocation, pick up Nolo's Essential Guide to Buying Your First Home (Nolo) - it's got something in it for everyone out there looking for a new home.

Ilona Bray

October 17, 2007

Self-Employed and Want to Buy a House? Good Luck

As we all know, for all its joys, being self-employed is no bed of roses. One of the bad things about it is that you're discriminated against in ways that wage slaves (employees) are not. One of the worst forms of discrimination comes when you want to buy a house. Lenders make it much more difficult for the self-employed to obtain a mortgage than they do employees. Because you don't have an employer to verify your income, they demand to see copies of your recent tax returns, a profit and loss statement, bank statements, and may even ask for copies of your contracts with your clients.

The self-employed often use stated-income loans that don't require as much documentation as regular loans. The price for using these loans, however, is a higher interest rate and larger down payment. I experienced this myself when I purchased a condo with a stated income loan several years ago. I had to put down more than 20% and pay a slightly higher interest rate. Even then, I was able to get the loan only because I had a high credit rating.

A recent story in USA Today reports that, due to the problems the mortgage loan industry is experiencing, obtaining loans is getting even harder for the self-employed. Many companies that provided stated income loans to the self-employed have gone out of business. And others have tightened their standards.

If you want to buy a home some time in the near future, you need to plan ahead to make sure you qualify for a loan. This may require that you save more money to enable you to make a large down payment. In addition, you'll want your net self-employed income to be as high as possible the two years before you apply for your loan. The key word here is "net." The more deductions you take, the lower your net self-employed income will be. Ordinarily this is great because it saves you taxes. However, if your net income is too low you may not be able to get a loan. If you plan to buy a home in the next year or two, you may wish to forego some deductions to make your net income as large as possible.

October 10, 2007

Home, Safe Home

A recent event has me thinking about safety: last week, a friend's home was burglarized, in the middle of the day, with neighbors around. Fortunately, no one was hurt, and it's an infrequent occurrence in the neighborhood.

However, it's a good reminder for home shoppers that before you buy, you should learn what you can about crime in your potential new neighborhood. Some websites will give you general statistics, but if you're seriously thinking of buying, it's best to do a more thorough search--even if you think you know a neighborhood well.

The internet is helpful here too, particularly city police department websites. For example, you can enter an address on the Oakland city police department's "Crimewatch" website to see crime history in the neighborhood in the last 90 days. Even smaller towns, like Davis, California, have similar tools.

If you're not able to get the information from the comfort of your own home, make the effort to go down to the police department. There you may find recent crime maps or other statistics, as well as those most knowledgeable about the crime patterns where you live. For example, you may find higher than expected crime rates if you're on the edge of an undesirable neighborhood, if there are several vacant homes on the street, or if the house is located next to a park or school with frequent, uncontrolled traffic.

While this information may not dictate whether you choose to buy in a certain neighborhood, it may help set your expectations once there. For example, if auto theft is high in the neighborhood, you might be careful about parking in a garage; if burglaries are common, you might want to install an alarm. And you may want to check the crime history on the home you're looking at--if there's a history of property crime, you could face similar problems and higher insurance premiums.

No matter what you decide to do with the information, it's better to be informed than to learn the hard way. And, my latest book (written with Ilona Bray & Marcia Stewart) has more tips on how you can assess the safety of your potential new neighborhood, so if you're interested in home-safety strategies, pick up a copy of Nolo's Essential Guide to Buying Your First Home (Nolo).

Alayna Schroeder

October 5, 2007

I'm a Subprime Borrower: What Do I Do Now?

Recently we talked about the subprime loan, a.k.a. the new scarlet letter. If you've seen your credit score (and made sure everything on your report is accurate--mistakes do happen!) or heard from a mortgage broker that you're a subprime borrower, what can you do?

One option: wait. Older credit history has less weight that more recent history, so if you spend some time diligently paying your bills promptly and don't open new lines of credit, you may see your score rise. At the same time, save what you can for a down payment (100% financing isn't as easily available as it once was). Of course, in a growing market you're losing the opportunity for increased equity, and interest rates could rise. Given the condition of today's real estate market and the relative stability of rates in recent months, the risk may be worth it.

Another option: check other lenders. You may be able to qualify for a loan if you work with a portfolio lender--that is, one that originates and keeps your loan, rather than selling it on the secondary market. That's because your loan won't necessarily have to meet the strict financial criteria lenders in the secondary market require. More creatively, keep family and friends in mind--sometimes they're willing and able to finance part or all of your purchase. Using CircleLending, you can set up a mortgage that's formal and legal.

One thing to do no matter what is resist temptation, especially in the form of adjustable rate mortgages with monthly adjustment periods or option payments. A hard lesson for many buyers in recent months: Sometimes, you just can't afford it. If you get offered a loan with an adjustable rate, find out how much your monthly payment will be at the full-adjusted rate--make sure the calculation includes principal, interest, taxes, and insurance (PITI), because you'll be paying all four--and how quickly, and over what time period, that adjustment can happen. If you can't afford it now, what's going to change in the next couple months?

Finally, don't count on a bailout from the federal government. The assistance plan President Bush announced recently will only apply to an estimated 80,000 borrowers. While proposed legislation may help avoid problems in the future, it won't necessarily get you out of hot water now.

To learn more about strategies for wrangling your finances during the subprime fiasco, I recommend Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom, by Attorney Robin Leonard (Nolo).

Alayna Schroeder

October 3, 2007

Reasons to Buy a House in a Down Market

Everyone gets a little wary when the real estate market starts to soften, as it recently has in many places. Homes are selling more slowly, and prices are plateauing or going down. Sellers are afraid of putting their house on the market when prices are at their lowest point, and in some cases, of losing money on the sale. But many buyers are also falling prey to fear, namely that the lowest prices have yet to arrive, and that they're therefore buying into a bad investment.

For buyers, at least, there are least three reasons to swallow your hesitation and get into the real estate market. These include:

1) A house isn't just any old investment, it's where you'll live! If you were thinking of investing in pork bellies, and the prices were about to go down, that would be a different analysis. But if you're looking to buy a home for the reasons that many people are -- like settling into a stable environment that you can customize to your own wishes and perhaps raise a family in -- why wait to get started? Life is short and the real estate market's short-term prospects are uncertain. In fact, in many parts of the U.S., the much-publicized real estate market downturn hasn't actually happened, and prices are continuing to rise. In any case, over the long term your house is likely to increase in value, as U.S. house values have ever since this country was founded.

2) You've got leverage when buying. (That's why they call this a "buyer's market".) Look090907_condo-sale.JPG at any local headlines, and you're likely to see stories of concessions made by desperate sellers or builders. Some sellers are offering to pay more than the traditional share of closing costs, plus leaving behind certain pieces of furniture or a flat screen TV. Builders of new homes are adding extra amenities, and throwing in cruises and other benefits that have little to do with the house. (Of course, some sellers are slower to accept reality and may hold out for an unrealistically high price, as discussed by John Schoen on MSNBC.)

3) If you're selling your own home, sure, it may be tough to sell and the profits may not be stunning, but you'll be saving money on the house you buy, too. If you wait until the market is hot, that next house may be out of your reach, particularly if you're looking for a larger house rather than downsizing.

Of course, I have to issue a couple of cautions. One concerns new, unestablished communities. If you're buying into a new development that's far away from an urban center or other conveniences, you may not want to take a chance on other people also seeing its long-term virtues. Living in a community of empty houses is no fun. And if you can predict with a fair amount of certainty that prices are about to go down where you're planning to buy, for example, because a new smelting plant is about to be built there, then of course you should think twice about buying.

To learn more about the red flags any homebuyer should be looking out for, read Nolo's Essential Guide to Buying Your First Home (Nolo), by the authors of this blog -- be it your first buying experience or your tenth, this book has something to offer every potential homeowner.

Ilona Bray