Nolo’s Real Estate Tips for Home Buyers

Getting It Done. Paul A. Rude, retired California General Contractor and Certified Member of the American Society of Home Inspectors, answers your questions on remodeling, dealing with contractors, and home maintenance.

The law in California and nearly all other states requires a permit for just about any remodeling project, so most homeowners get permits, right? Wrong. Private home inspectors see non-permitted work every day. Here in the San Francisco Bay Area, the consensus among experienced ASHI inspectors is that at least 60 to 70 percent of all home remodeling is done without permits. When I ran this number by a local city inspector with more than 20 years of experience, she laughed and said it sounded too low.

Why is so much work done without official sanction? First, the application process can be daunting. Many communities have obscure and sometimes unbelievable restrictions, often intended to maintain the "authentic" character of their neighborhoods. If your bath requires changing a single window, you may have to pay for a design review, additional drawings, or even a public hearing. In general, the larger the city, the more complex the requirements, although some small, exclusive cities also have very stringent rules.

And a bureaucratic blessing doesn't come cheap anymore. In the old days, permit fees were nominal, but California cities have seen their tax base dwindle since Proposition 13 passed in 1978, and they have jacked up all sorts of fees to compensate. A permit for a modest remodel can easily be $2,000 or more -- not to mention that city offices are almost never open, except when you have to take time off work to visit them.

Then there's the tax thing. In California, under Prop. 13, property taxes are based on the price you paid for the house, plus limited annual increases and local assessments. If you bought your home 15 years ago for $150,000, your taxes might have been about $2,000 a year at first. With annual increases and new assessments, they might now be $3,000 or so -- still low by present standards. But an addition or major remodel will be assessed at today's values, according to a formula in the state tax code. The cost of a large addition could easily exceed the original cost of the house, possibly doubling the taxes. If you stay in the house long enough, the tax bill may eventually exceed the construction costs.

So, do you get a permit or not? Follow your conscience. But if you're going the outlaw route, talk to the neighbors first. Few cities have the resources to monitor neighborhoods for power-saw noise -- the main source of Stop Work orders is complaints from neighbors. If you have a long-running feud with the guy next door, he might get even by calling in your unlicensed bath remodel. If a neighbor's big remodel project does have a permit, the city inspector will be coming around and might notice your off-the-books project. Even if you play by the rules, it's always best to let folks know what changes you're planning. It's just human nature to be agreeable when someone consults you in advance, and to be annoyed when noise and contractors' trucks show up unexpectedly.

Paul is the owner of Summer Street Inspections in Berkeley CA. His opinions are based on conditions in California and the San Francisco Bay Area. Conditions elsewhere may be substantially different. Contact Paul at paul@summerinspect.com. To find an ASHI inspector in the Bay Area, go to www.ggashi.org. Elsewhere, go to www.ashi.org.

News has spread: recent legislation signed by President Bush will put cash back into taxpayer hands--$600 for most individuals, $1,200 for couples, and an additional $300 for each child.

If you're looking to buy your first house, the extra cash can't hurt. But if you're looking to buy a house that costs more than $417,000, that may not be the best part of the new plan. It also raises nonconforming loan limits from $417,000 to up to $729,750 in high-cost areas. This applies to loans originated through the rest of the year.

What exactly does that mean? Hopefully, if you're borrowing in the range identified, a lower interest rate. Because nonconforming loans can't be resold to Fannie Mae or Freddie Mac, the two largest purchasers on the secondary market, they've generally carried higher interest rates. As Sue McAllister points out in the Silicon Valley Real Estate Blog, borrowers will have to wait and see whether lenders will start dropping rates on these larger loans to conforming loan levels right away, in anticipation that they'll be repurchased on the secondary market.

At this point, too much is unknown--and it may not be time to start cheering. Critics point out that the higher loan limits will be based on local median home prices, and probably won't affect most markets. And while Fannie Mae and Freddie Mac are authorized to buy these loans, they aren't required to.

Also, investors may not be as comfortable with securities backed by these newly eligible loans, because they remain riskier. As Bankrate's Holden Lewis notes, that could mean that mortgage-backed securities segregate regular conforming loans from these new "superconforming" loans. If so, rates on the superconforming loans are still sure to be higher.

If you're looking to buy between now and the end of the year, and you're expecting to borrow more than $417,000 because median home prices where you live are sky high, stay tuned.

Alayna Schroeder

Today, we're introducing a special feature: Guest blogger Paul A. Rude, a retired California General Contractor and Certified Member of the American Society of Home Inspectors. Paul will answer reader questions on remodeling, dealing with contractors, and home maintenance.

We need to add a bath in our family room so our teenagers and guests can have more privacy. Do we need to get a permit?

Absolutely. With very few exceptions, a permit is required for anything that involves structural work, opening wall surfaces, or changes to electrical, plumbing, or other utilities. Of course, you should also stick to the speed limit on the freeway, not jaywalk, and never claim questionable tax deductions.

If you work without a permit and the local authorities find out about it, they will issue a Stop Work order. You will then have to submit plans, obtain any zoning approval that may be required, and pay a penalty on permit fees. This can stall a project for months. Work already completed may have to be redone if it doesn't meet current standards; this can be expensive. There may be code or zoning standards that would be impossible to meet, in which case you may have to pay to restore the house to its original condition.

Even if you don't get caught, there are still some negatives. Most experienced contractors will not work without a permit, as it can jeopardize their license. Unless you're doing the work yourself (a topic for another day), you may have to hire an inexperienced or unlicensed contractor who is more likely to cut corners and make mistakes. These guys usually don't have insurance, so you could be liable if someone gets hurt or if a lumber delivery lands on your neighbor's Lexus. When you sell the house, you must disclose to the buyers any work done without permits. Failure to do so can expose you to a costly lawsuit.

Paul is the owner of Summer Street Inspections in Berkeley, California. His opinions are based on conditions in California and the San Francisco Bay Area. Conditions elsewhere may be substantially different. Contact Paul at paul@summerinspect.com. To find an ASHI inspector in the Bay Area, go to www.ggashi.org . Elsewhere, go to www.ashi.org

All this talk of foreclosures, interest rates, trouble in the mortgage industry--what does it mean if you're a first time buyer?

Here's the picture a few years ago: the market was hot. Buyers, without a single penny down, financed 100% of their purchases, with historically low interest rates. Some didn't have the income to support a fixed-rate payment, so they either used stated income loans (sometimes called liar loans, because income information was often fabricated) or creative adjustable rate mortgages (interest only, frequent adjustment periods, option ARMs, or some combination of these) to lower monthly payments, increasing the overall amount they could borrow.

The picture today: According to an article at CNNMoney.com, you can probably forget 100% financing. Plan to put at least 5% down--10% if you're in a falling market. If you need a jumbo loan (more than $417,000), you'll also find that it costs a little more. And if you have a low credit score, you'll probably have to pay an additional, upfront mortgage fee.

But the good news? Interest rates have stayed pretty low, and prices in most places have come down while inventory has come up. It's a buyer's market--a savvy, solvent buyer's market, that is.

Alayna Schroeder

I recently lived through a California storm large enough for the national headlines to call a "hurricane," with 80-mile-an-hour winds and torrential rain. That's not something we see around here often. And although I mostly watched events from the comfort of my own home, where the power mercifully stayed on and the roof held strong, the experience made me look at my house in a whole different way.

That beloved tree in the backyard suddenly became a potential hazard, its branches waving threateningly. (In fact, an insurance broker I know says they've gotten numerous downed-tree claims since the storm.) I noticed how close the telephone poles are to our house - one good topple and the power lines would be on our roof. And I discovered a new flaw in our front porch - it has no water drain, and required bailing to remove the small lake that collected there.

On the TV news, I watched people endure much worse. And I kept thinking, "Why would you buy a house on such a steep hill/by a creek/next to all those tall trees?" Easy for me to say -- I wasn't there on a sunny day, when those houses probably looked beautiful and had great views of the San Francisco Bay.

But now, more than ever, it's worth imagining what rough climate conditions can do to your prospective home. And relying on the home's history may not do it. Yes, I confess, I just got around to watching An Inconvenient Truth last weekend. And although I already knew much of what's in it, the movie really brings home how much might change in the next 50 years, and the degree to which extreme weather patterns are already affecting the United States (and the world). (One relevant factoid from the movie: The number of Category 4 and 5 hurricanes has almost doubled in the last 30 years.)

Frankly, I don't understand why the real estate industry isn't talking more about this. So what if some people still think it's a "political" issue - shouldn't the mere possibility of increased hurricanes and 20-foot sea level rises have anyone with an ounce of investor's savvy think twice about buying, say, waterfront property? But talking about this openly still seems to be perceived as either taboo or a downer for the already-down real estate market.

So, where should you go for information? Check out NextGenerationEarth, by the Earth Institute at Columbia University, which offers state-by-state summaries. The Natural Resources Defense Council (NRDC) website also has some good general information on global warming, with a special report on how global warming will affect Florida. I've been looking for a website that will tell you how high your house is above sea level, but no luck yet. (Anyone got a hot lead?) And keep your eyes on the news!

Ilona Bray

Yes, we harped on it in our book (Nolo's Essential Guide to Buying Your First Home), but it's nice to have confirmation from Consumer Reports nonetheless:

Buying homeowners' insurance is not a time to go cheap and get the minimum. In fact, buying too little insurance is listed in a story in Consumer Reports' February 2008 issue as one of 12 major blunders that could cost you $1 million.

Why? Because the amount you're given to replace your house, in a disaster, may not allow you to rebuild what you had, and you'll lose any home appreciation you gained over time. Yes, disasters (such as fires, earthquakes, and floods) are unlikely, but the message here seems to be, why gamble on such a huge part of your life -- and your net worth?

The other major blunders are mostly focused on retirement planning and keeping yourself healthy. But when it comes to homeownership, insurance is a biggie.

Ilona Bray

Dedicated dog showers are in (no more kitchen sink baths for Fido). The living room is out (replaced by the multi-use great room). We have this on no less authority than real estate author, broker, and columnist Mark Nash, whose annual list of What's In, What's Out with Home Buyers has just been published. Mark's lists are so interesting (and usually on target), I thought my readers would be interested in seeing it in full, so click on over to the article at Realty Times. For more Mark Nash columns and articles, on everything from shopping for a home when you're pregnant to purchasing flood insurance, see his website www.1001realestatetips.com. You're bound to learn something new and interesting! (Snoring rooms, anyone?)

Marcia Stewart

One of the best things about buying a house is having more space than in your typical apartment. Of course, having that extra space can be a problem for those of us who self-identify as disorganized (a much nicer term than pack rat). I'm not the only one. Getting organized is among the top five New Year's resolutions, according to the National Association of Professional Organizers. And every time I turn around, I see another article about getting organized, such as the January 1 piece in The New York Times, "A Clutter Too Deep for Mere Bins and Shelves," by Tara Parker-Pope.

While the piece focused more on compulsive hoarders (an estimated 1.5 million Americans suffer from this problem), I did learn of a new resource -- the National Study Group on Chronic Disorganization (www.nsgdc.org), which has (among other things) a questionnaire to help determine if you are chronically disorganized. Most people don't need a questionnaire to figure that one out, but if you like questionnaires, give it a try.

So, if getting your house organized is one of your main New Year's resolutions, where do you start? One of my favorite resources is Eliminate Chaos: The 10-Step Process to Organize Your Home and Life, by Laura Leist (Sasquatch Books, 2006). You can find lots of useful organizing products and systems at Target or The Container Store. If you can afford it, a professional organizer can work wonders in a disorganized home. (For referrals, check out www.napo.net.) The main thing is to get started - even if you start small, perhaps by organizing your shoes, or buying a spice rack.

-Marcia Stewart

Remember this guy's story? You know, Kyle MacDonald, who traded his way from one red paperclip to a house in Kipling, Saskatchewan (yes, that's in Canada). He went from being unemployed and bumming off his girlfriend in a Toronto apartment to real, live homeownership, and all without ever filling out a mortgage application.

Well, now he's written a book about it called, appropriately enough, One Red Paperclip (or Un Trombone Rouge, if you're buying it in Quebec). Of course, I felt it my duty to read it, in case our would-be homebuying readers could stop saving for down payments and start looking for red paperclips instead.

The short answer: Keep saving for the down payment.

But read the book for fun anyway. The author truly seems to subscribe to the notion that the journey is as important as the destination. He takes some insanely long trips for his trades, from Amherst, Massachusetts for a Coleman stove to Phoenix, Arizona for a coupon entitling someone to an afternoon with Alice Cooper. And he seems to have good instincts about finding legitimate trades with colorful people who will make good copy. Although other reviewers have pointed out that Kyle MacDonald's writing style is more youthful than literary, I found it refreshing that he clearly wrote his own book - unlike many other famous folks!

And yes, he is famous now. Although interest in Kyle's trades went a bit slowly at first, he basically became a media phenomenon. People wanted to trade with him just to get their name in the paper.

So there's the secret, revealed: Come up with a great idea, turn yourself into a media phenomenon, and parlay that into owning a home. And don't forget to write a book about it. I promise to read it!

Ilona Bray

A few months ago at a social gathering--well after the mortgage industry's problems were coming to light--I met a woman in her mid-twenties who was a real estate appraiser. "My job is easy," she told me, wide-eyed and innocent. "All I have to do is go in and say that the value of the property is the sales price." Yikes. This professional approach is indicative of an industry-wide problem: and it helps explain why so many homeowners are in such a jam right now, struggling with unaffordable mortgages that banked on equity that either didn't exist or didn't materialize.

And there are no quick fixes. The Bush Administration's newly revealed mortgage rescue plan received a lot of attention last week. The basics of the plan are this: borrowers who took out adjustable rate loans (with initial rate periods of 36 months or less) between January 1, 2005 and July 31, 2007 that are due to reset between January 1, 2008 and July 31, 2010  are eligible for a five year interest rate "freeze." Lender participation is voluntary.

Critics noted that the plan is likely to aid very few borrowers, and since it's intended to prevent foreclosures, doesn't do anything for those borrowers already in it. In a New York Times editorial, Paul Krugman pointed out that its real purpose is to "create the appearance of action", thus undercutting support for alternative plans with actual bite. Looking at how few will likely benefit from the plan, and its voluntary nature, it's hard not to agree.

So who won't benefit? Anyone who has lost a home to foreclosure already (according to one estimate, approximately 800,000 since mid-2007), seen an adjustment they can't afford, took out an ARM before the set period, bought with a conventional loan, has a decent or improved credit score, or (like 55% of subprime borrowers) was given a subprime loan when they could have qualified for a conventional one. In short, a lot of people. And that doesn't even deal with investors who have seen drops in the value of mortgage-backed securities, or the borrowers who can take advantage of the plan--but still have the same mortgage, perhaps one they can't afford to pay, five years later.

Amidst all this, the mortgage industry bemoans its losses. But it's a lot harder to feel very sympathetic toward those who created and sold these products to people who weren't capable of affording them--and astonishingly enough, sold them to people who were capable of affording something better, like a conventional loan without an astronomical future interest rate.

Alayna Schroeder

Shopping for friends or family who just bought their first home? Here are some holiday gift ideas that are sure to be appreciated.

1. Gift certificate for Target, Home Depot, or a favorite hardware or home improvement store. First-timers love to buy things for their new house or condo, but are often strapped for cash. Your gift certificate can help finance that weed whacker or new drill they've been lusting after -- or even be used to sign up for a home improvement class.


2. New plants, pots, or tools for the garden. For many people, one of the best things about buying a home is the space to start a garden (even if it's just a deck or patio for container gardening). Check out a local nursery, Smith and Hawken or The Gardener's Supply Company, for lots of gift ideas. If you're buying plants, be sure to read the plant labels carefully - you don't want to give someone a shrub that will take over their entire yard, or a flower that needs constant watering and attention.


3. A local guidebook. Even if someone is not new to the area, it's always nice to have an up-to-date guide to local hiking trails, restaurants, or bargain shopping.


4. Home-related books and magazine subscriptions--whether decorating, cooking, entertaining, or home repairs--are sure to be a big hit. There are hundreds of options (depending on the particular homeowner's tastes), including books and magazines by Martha Stewart such as Martha Stewart's Homekeeping Handbook: The Essential Guide to Caring for Everything in Your Home; Real Simple magazine (especially good for people who love to organize); Sunset Magazine and Sunset Books ; ReadyMade Magazine for creative do-it-yourselfers; Food & Wine magazine, cookbook or club; or Elle Décor or Architectural Digest (for more sophisticated tastes). If in doubt, buy a gift certificate from your local bookstore, Amazon, Barnes & Noble, or Borders.


5. Functional, but beautiful items, such as a decorative nightlight, candles, soap, or a throw for the living room are great gifts (just make sure they match the décor and color scheme). Forget anything for the kitchen, such as new wine glasses, unless you know for sure they are on the holiday gift wish list. If in doubt, go the gift certificate route again--whether it's a local store or a big chain like Target, Bed Bath and Beyond, Crate and Barrel, or Sur La Table.


6. A framed photo or drawing of the house (if you're artistic) is a wonderful gift (assuming the real estate agent hasn't already thought of the idea).


7. Entertaining items for nesting (new home buyers will probably be doing a lot more cocooning than pricy nights out). A subscription to Netflix or a board game (there are dozens of versions of Monopoly available, from the classic to a Boston Red Sox special edition) are just a few ideas for at-home entertainment.


8. Food basket. Anyone on a tight budget will appreciate getting luxury edibles that they won't be buying on their own for a while (whether special vinegars, chocolates, chutneys, or pastas). Trader Joe's and Whole Foods both carry lots of good items for a tasty food basket.


9. A house-related Christmas tree ornament (for those who celebrate Christmas), with the date and street address of the new home. Sounds schmaltzy but is bound to please.


10. The gift of time. This is the best gift yet for new homebuyers. Make up your own coupon or gift certificate offering a set number of hours of your time helping with a home project (painting, weeding the garden, grouting, or pulling up old carpet). Or offer to bring dinner over one night, babysit the kids, or walk the dog.

And if you're looking for a gift for friends who are looking for their first home, don't forget our book, Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, and Marcia Stewart.

Marcia Stewart

As if homebuyers around the world didn't have enough to worry about, and enough vocabulary to learn: Those in the U.K. (especially, England, Ireland, and Wales), may encounter "gazumping," where the seller can accept another (better) offer at the last minute, even after having said yes to the original buyer's offer long ago; and "gazundering," where the buyer can wait until the last minute to say "I won't go through with the sale unless you lower the price."

(I'm not making this up! Here's an example from Ireland of overseas media coverage of this issue.) Like so many colorful words, gazumping and gazundering are reputedly of Yiddish origin.

And now, with Thanksgiving coming, let's all take a moment to give thanks to U.S. real estate laws. The reason gazumping and gazundering can happen in the U.K. is that the seller's acceptance of the buyer's offer is done orally, and doesn't make the deal legally binding. They wait to sign a written contract until the end of what we think of as the escrow or closing period - after they've performed all the usual tasks like examining the property and its title. That can take several weeks no matter where you live, during which time either party can pull out of the deal for any reason. Though they're expected to honor their oral deal, it obviously doesn't always work that way.

Here in the U.S., you normally sign the contract early on, but pack it with "contingencies," to give you an out - or grounds for renegotiation - if circumstances change as you prepare to close the deal. For example, if you're the buyer, you'll want to make sure your contract contains an inspection contingency, letting you pull out if you find that the house contains physical defects that you weren't originally aware of. The seller may also put contingencies into the contract -- for example, making the house sale conditional on finding another house to buy. We've said it before, but we'll say it again: Don't give up your chance to add self-protective contingencies to your contract!

Still, this look across the pond is a good reminder that, in any house sale, it ain't over till it's over. Sellers and buyers, ethically or not, may try to mold the agreement to their interests and pull last-minute surprises. Usually the surprises are minor, and easy to negotiate around (another reason to choose a real estate agent who's a good negotiator). But in case of major surprises, realize that even with a binding contract, you may need to make a trip to the courthouse to enforce your agreement.

To learn more about the escrow process here in the good ol' U.S. of A., read Nolo's Essential Guide to Buying Your First Home (Nolo), by the authors of this blog, or go to our good friend Sandy Gadow's website at www.escrowhelp.com.

Ilona Bray

A two-bedroom, modest home in my neighborhood just sold for $55,000 over the asking price, after receiving several bids. And yes, I did write this in November 2007, when the national headlines were full of nothing but doom and gloom about the housing market.

I can't help wondering whether some of the people who were outbid were relying on those national headlines. I know for a fact that at least one of them bid at the asking price. Perhaps they hadn't really done their homework about the local market, where competing bids at far over asking price continue to be a common (and frustrating) feature of homebuying.

Home prices have actually risen over the past year in five of the 20 cities studied by the widely followed S&P/Case-Shiller Index. These include Atlanta, Charlotte, Dallas, Portland, and -- with the biggest gains -- Seattle.

But plenty of cities aren't covered by this study, and even regional trends don't tell the whole story. That's why it's important to get to know your local market -- even at the neighborhood level -- before bidding on a house. Go to open houses and quiz the selling agent about how many offers they anticipate, ask your agent to pull up actual sales prices on comparable houses sold within the last few months (or research these yourself on sites like Zillow), talk to the neighbors, read the local headlines, and more. Then you'll be ready to submit an appropriately priced and crafted bid.

To learn more about how to assess the market in your area - or even somewhere you've never been - check out Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, & Marcia Stewart (Nolo).

Ilona Bray

Looks like it's time for me to take down the Halloween decorations and get ready for the next spate of holidays. My family always gets absurdly nostalgic about saying goodbye to holidays just passed - my mother once left the Christmas tree up until Valentine's Day. (I remember, because we replaced the ornaments with hearts, as a joke.)

But aside from sentiment, one of the worst things about taking down decorations is that you've got to repack them and find space to store them. And if you're the owner of a small, starter house like I am, storage is a never-ending problem.

So, as one who is already stretching the limits of her attic, let me caution new homeowners: Don't buy too much decorative stuff! Especially the space-consuming, landfill clogging plastic type of decorations. Paper products at least stack or fold up nicely, and can ultimately be recycled.

You'll go easier on your budget, too. According to Forbes, Americans paid a total of around $1.4 billion for Halloween decorations this year. Although that still translates to an expenditure of only $26.59 per person buying, the numbers have been steadily rising - and retailers are responding with new temptations. And we're only at the start of the holiday buying season . . . .

Ilona Bray

The recent fires that have plagued Southern California remind us of one of the more mundane aspects of shopping for a home: buying homeowners insurance. It's hard, before you even have keys to your new home, to think about what will happen if it's destroyed or damaged. It's especially difficult when you're already about to spend a huge sum of money on the purchase itself. You may be tempted to cut corners when it comes to buying insurance, but don't.

The most important policy you'll buy will be hazard insurance, which will cover you for major disasters and theft, but will have major exclusions too (including flood and earthquake damage). At very least your policy should have "replacement cost coverage," which will be based on the cost of replacing your home and its contents, not "actual cash value" coverage, which only covers the current, depreciated value of your home and its contents. You'll also need loss of use coverage, paying you for extraordinary expenses you incur as a result of not being able to use your home. You'll want to know the overall dollar and time limits for receiving loss of use payments.

You'll also need liability coverage, which will cover the medical costs of guests who sustain injuries in you home, as well as related court costs you may incur. Policy limits may be too low given the cost of medical expenses today; you may want to purchase additional coverage.

Depending on your situation, you may also purchase flood or earthquake insurance, which is well worth it if you live with risk of either. (Check your flood danger and earthquake risk yourself.) And many homeowners need personal property floater policies, covering specific high-value items like jewelry.

To find the best policy for you, consider working with an insurance broker. The broker will have access to many different companies' policies and can answer questions you have about what each policy offers (of course, that's no substitute for reading it yourself). Compare at least three or four separate policies before making a decision. Don't base your decision solely on lowest price--instead, look for quality of coverage. You can use a handy form like the one here.

These careful decisions will make it easier to deal with your insurance company when it comes to a fire or other qualifying incident. (For tips on what to do after a fire, see the article in Nolopedia entitled After the Fire: Dealing with Your Insurance Company.) Hopefully, you'll never have to deal with these problems at all.

If you want to learn more about the types of insurance that are available to homeowners, check out Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, & Marcia Stewart (Nolo).

Alayna Schroeder