Nolo’s Real Estate Tips for Home Buyers

I love "best" lists, because they're usually:
1) short and snappy.
2) based on a decent amount of research, and
3) give you a sense (maybe artificial) that the world can be ranked in an orderly way.

And this seems to be the season for best lists. For example, Forbes magazine has named its ten best retirement spots. Yes, Florida is on there, but not in the first three, which include:
1) Montgomery County, Pennsylvania
2) Nassau County, New York, and
3) Pima County, Arizona.

U.S. News & World Report magazine has named its 2009 ten best places to live in the U.S. based on factors like strong economies, low costs of living, access to healthcare and education, and recreation. Its top three are:
1) Albuquerque, New Mexico
2) Auburn, Alabama, and
3) Austin, Texas.
(Apparently, use of the letter "A" in the name was a criterion as well.)

And not to be outdone, Kiplinger's magazine has named the ten top U.S. cities for stable employment and new career opportunities. Start packing your bags for:
1) Huntsville, Alabama
2) Albuquerque, New Mexico, or
3) Washington, D.C.

Hey, Albuquerque made two out of the three lists! Maybe I should start packing.

Moving to a new house is a thrill, and will probably offer lots of benefits to your children if you have any: separate bedrooms, a bigger play area, maybe even the possibility of their first cat or dog.

Yet despite all that, your children  may not share your excitement at moving. As child and family therapist Debbie Essex told us when we were writing our book Nolo's Essential Guide to Buying Your First Home, "One of the reasons moving is tough on children is that they've usually had very little input into the process -- they just feel like their lives are being disrupted."

One way of helping kids deal with those feelings is to read them (or gently suggest they read) books about other children who've gone through the same thing. In fact, I'm told by a Berkeley librarian that such books get a lot of requests. We mentioned a few good books in our Nolo guide, but more are out there, even a few recently published goodies. Here's a list of some I've come across:

Plum Fantastic, by Whoopi Goldberg and Deborah Underwood (Hyperion, 2008): Alexandra Petrakova Johnson moves from a small southern town to New York City, where her mother enrolls her in ballet lessons despite her wish to become a speed skater. She must learn to make new friends, conquer stage fright, and more. 

Aldo Applesauce, by Johanna Hurwitz (Puffin, 1989): Aldo, a fourth-grader and vegetarian from New York, adjusts to his family's move to a small town.

Anastasia Again, by Lois Lowry (Yearling, 1982): Fans of Anastasia Krupnik will enjoy watching her deal with her parents' move to the suburbs.

Mr. Rogers' Moving, by Fred Rogers (GP Putnam): I'm from the generation that watched Mr. Rogers so much that I can still sing "It's a Beautiful Day in the Neighborhood", so I have to trust this nonfiction, read-along guide for toddlers!

Alexander, Who's Not (Do You Hear Me? I Mean It!) Going to Move, by Judith Viorst (Atheneum, 1998): The title says it all, at least until Alexander has said goodbye to all his favorite things and come around to the idea of moving.

The recent economic stimulus bill lets first-time home buyers take a substantial tax credit -- either on their 2008 or 2009 taxes! This can work even if you haven't bought your house yet. You'd need to either file for an extension now or file an amended return later this year, after the purchase.

The exact amount of the credit is either $8,000 or 10% of the home's value, whichever is less.

For an excellent set of instructions on how to take the credit in 2008, see USA TODAY finance columnist Sandra Block's article, "Claiming this year's first-time home buyer's tax credit is easy," in the Tuesday, March 31st edition of USA TODAY. And for other details, see the CNN article, "Final score: $8,000 for homebuyers."

It's been about a year since I posted a blog wondering whether it wasn't time for homeowners to start checking out possible rises in sea level before buying a house near the coast -- and I still haven't found a website that lets you figure out how high the water is predicted to rise in local areas.

But wait, it looks like scientists may be changing the way they calculate rising amounts anyway.  In fact, they're saying some areas may experience higher rises than others (watch out Washington, DC). Find out more here.

Too bad it's not freshwater levels that are rising -- my plants are suffering in this California drought.

With the economy down, you might assume you can no longer afford the "luxury" of a home built using green construction techniques and materials. But the latest reports show that other buyers who've done the math are still convinced that the energy-saving features of green construction make it a good deal.

See, for example, this article by Mari Saito in the Philadelphia Business Journal, describing one condo buyer's shock that her monthly electricity bill went from about $280 per month in her former loft to just $76.

And in a related article by Diane M. Fiske, the Journal describes how one local developer is coming up with efficient ways to build homes that are both affordable and energy-saving. An important part of the strategy is the use of SIPS, or "standard insulated panels." These panels are made of wood (either young farmed trees or leftover wood flakes) and a foam insulating material. They're precut to the designer's specifications and put together on site, like a giant puzzle. They're getting high reviews for environmental friendliness (like reduced wood waste) and tight, heat-conserving qualities.

By the way, if you're building your own house, SIPS might be a good option as well. For more information on SIPS, see:

• http://www.toolbase.org/Technology-Inventory/Whole-House-Systems/structural-insulated-panels
• http://www.sips.org/content/technical/index.cfm?pageId=20
• http://www.usa-sips.com/faq.htm
  

Many homebuyers are overwhelmed by a sea of paperwork when they sit down at the closing table. Buried in the paperwork is the HUD-1: the settlement statement that summarizes the buyer's (mostly mortgage-related) closing fees.

Buyers should see the HUD-1 before closing, in draft form. But things can and do change before getting to the closing table, and many buyers find new or increased fees tacked on at the last minute. Those anxious to close may not bicker with the higher fees, or even notice them as they deal with everything else. But the Department of Housing and Urban Development (HUD) has noticed the trend. After much debate, HUD has created some new mortgage rules to deal with it, hoping to save homebuyers an average of nearly $700 at the closing table.

The most important change is that now, lenders and brokers are required to provide buyers with a standard Good Faith Estimate (GFE) within three days of receiving a mortgage application. (The GFE was commonly used in the past, but no standard format existed.) On the GFE, brokers must now disclose how they're paid, through the "origination charge."

This is the cost to the borrower for getting the loan, expressed as a percentage of the overall loan amount. The charge may be paid in "discount points" (points the borrower pays upfront in exchange for a lower interest rate) or as part of the interest rate itself.

In addition, lenders and brokers can't increase some costs between the GFE and the HUD-1, and other costs can only go up by up to 10%. For example:

• Origination charge: cannot increase.
• Transfer taxes: cannot increase.
• Appraisal fees: can only increase up to 10%.
• Government recording fees: can only increase up to 10%.
• Title insurance: can only increase up to 10% if borrower uses the title insurer selected by the lender.

The HUD-1 is also revamped to make it easier for borrowers to compare to the GFE. Lenders and brokers aren't required to start using these forms until January 1, 2010 -- but they're allowed to use them immediately. If you don't receive a GFE when you apply for a loan, ask for one -- or better yet, ask the lender to use the new forms together and to agree to be bound by the fee increases on those forms.

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.

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

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