Blog

Buying your first home is an important and exciting undertaking, but first time home buyers may be unprepared for the task. The real estate business can be complicated for someone who has never experienced it before. You should not begin your search without being prepared for what to expect. There are several things every home buyer should be aware of to avoid feeling stressed or overwhelmed by the real estate market.

Be Informed

First, understand real estate is different wherever you go. This is why different states require different certifications for real estate agents. You can find out about general real estate procedures from anyone, but make sure you talk to real estate agent to become familiar with the local market. This agent does not have to be your agent, just someone who is willing to talk to you. Ask about the following items:

• Home inspections: Know what they involve, how much they cost and when to do them.
• Expenses: Understand standard commission rates, local taxes, closing fees, etc.
• The local market: Inquire about the success rate of real estate in your area.
• Questions: Always be sure to ask about any concerns you may have.

You want to be fully informed as you begin planning for a major, life-changing decision. It is a real estate agent’s job to be informed and helpful; if you don’t feel an agent is satisfactory, try someone else.

Prepare Yourself

Before you begin looking for a new home, there are a couple of things you should do. First, find a helpful real estate agent who will guide you through the process. Make sure you get an agent who you trust to be knowledgeable and who makes you feel comfortable. Next, make sure all of your finances are in order. Check your credit report before you apply for your mortgage. Finally, make a list of what you want in a house: the price and features of the home. If you know what you are looking for, it will be easier to find what you want and to make a decision.

Start Looking

Start your search with the resources on this site homes for sale. Once you have found homes you are interested in, have your real estate agent make sure everything is in order with the home and make an offer. Many people are afraid to make an offer but shouldn’t be. Remember that your offer is negotiable. Also, try to stay relaxed through the home buying process. Problems often arise, but if you remain calm it will be easier to work through them.

Being a first time home buyer is a big step toward independence. Start the process off right by being prepared and knowing what to expect in the real estate market. Your future home is out there waiting; finding it is up to you.

Is seller on the hook for concealed flaws?

Barry Stone
Inman News
DEAR BARRY: We just bought a home and discovered a major undisclosed foundation problem after moving in. The seller insisted on an as-is sale, so we relied on the home inspector to find any serious problems.

In the basement, he noticed old water stains in an alcove that had been paneled and carpeted. We asked the seller to replace the paneling and carpet, but he refused to do any kind of work on the property. So we agreed to replace the stained materials after the sale in exchange for material costs.

But when we removed the paneling, we found a foundation wall that was crumbling and leaning. A contractor friend tells us that the patio will need to be removed and the exterior excavated to enable replacement of this wall. Do we have any recourse with the seller for nondisclosure? –Marci

DEAR MARCI: The seller had the right to an as-is sale, but he also had the obligation to disclose all known defects. The underlying question is whether he knew about the faulty foundation. If the paneling was installed during the time he owned the property, he was probably aware of the damage and should have disclosed it.

When you agreed to do the repair work yourselves, you should have removed the paneling before completing the purchase. That would have been part of your discovery process. Then the extent of the problem would have been revealed before you bought the property.

Home inspectors often recommend evaluation of concealed conditions prior to the close of escrow, especially where evidence of past leakage is apparent.

Now that the extent of the problem is known, you’ll have to decide whether to pursue the seller for nondisclosure or simply accept the outcome as a learning experience. A real estate attorney can advise you regarding the costs and likely outcome of pursuing the seller. In some cases, a strongly worded letter is all that is needed.

DEAR BARRY: My husband and I bought our home about a year ago. It was inspected and no major defects were found. The previous owner renovated the interior, including the basement, and installed a French drain system. We asked if there was ever a problem of water in the basement, and the seller said there never was.

But now we get water in the basement every time it rains. There’s no way the previous owner did not know about this, especially if he installed a French drain. Do you think he is liable for the cost of repairs? –Valerie

DEAR VALERIE: If your state requires seller disclosure, the seller should have informed you of this condition, especially if the question of drainage was raised at the time of the sale. You should notify the seller of your concerns immediately and ask that he address this problem. Communication should be made by certified mail so that you have documentation.

To determine the cost of repair, the problem should be evaluated by a geotechnical engineer or a licensed contractor who specializes in drainage repairs. If the cost of repairs is within the range of small claims court, you’ll have the seller in a vulnerable position. If legal action becomes necessary, be sure to consult an attorney.

Tara-Nicholle Nelson
Inman News

Book Review
Title: “The Urban Homestead: Your Guide to Self-Sufficient Living in the Heart of the City”
Authors: Kelly Coyne and Erik Knutzen
Publisher: Process Media, 2010; 330 pages; $16.95

My town, Oakland, Calif., claims to be the epicenter of the urban gardening movement. The urban part is pretty self-explanatory. What is surprising is that it’s an everyday occurrence to overhear conversations at Oakland neighborhood coffee shops about backyard beehives, chickens and goats.

Oakland ranks near the top of American cities when it comes to vegetable consumption. Wanna find the average 30-something Oaklander on a Saturday morning? Your best bet is the sprawling, certified-organic Grand Lake Farmers Market (though, admittedly, the popular Belgian waffle truck, the rotisserie chicken trailer and the knife sharpener stand are not, strictly speaking, organic “veg”).

My home sits on a quarter-acre lot; standard in middle America, but massive in my city — and an intimidating prospect to consider planting. I’m also borderline-obsessed with the idea of growing what I eat, sustaining a home-grown, organic, plant-heavy, waste-light diet, all just a few miles from the financial district of San Francisco.

It’s tough to envision and execute on converting my quarter acre of weeds into a quarter acre of orderly urban farmland. And then, there’s this: I was in my 20s before I realized you could make waffles at home. I’d only ever known the frozen. No joke.

So, how on earth was I going to go from that to the doyenne of where my dogs can run wild alongside bees, chickens and goats, where my compost nourishes my homegrown food, and where my own personal beehive pollinates my own plants?

So, I was excited to lay my hands on “The Urban Homestead: Your Guide to Self-Sufficient Living in the Heart of the City,” by Los Angeles homesteaders Kelly Coyne and Erik Knutzen, part of Process Media’s Self-Reliance Series.

I had hopes for a basic guide that rendered this daunting task a whole lot more doable; “The Urban Homestead” did not disappoint. It also became very clear from the jump that Coyne and Knutzen were writing for me, but not only for people with a big yard in which to plant their food.

Urban homesteading, by the authors’ reckoning, is definitely a real estate issue, but they exhort readers to be flexible in how they think about the real estate it takes, reimagining apartment windows, front yards, vacant lots and even fire escapes as their own urban farms: “The truth is that you can grow a hell of a lot of food on a small amount of real estate. You can grow food whether you’re in an apartment or a house, whether you rent or you own.”

But it’s not only about real estate and food — Coyne and Knutzen include generating your own water, power and even self-reliant transportation in their broader definition of what homesteading can be. At the same time, they invite readers to take as much — or as little — of their homesteading advice as they like, explaining: “we homestead at our own pace, to suit ourselves.”

Chapter 1 — Start Your Own Farm — offers basic concepts, strategies and practical principles for growing your food in an urban setting, both on small (container gardening) and large (guerrilla gardening in vacant lots, for example) scales, and everything in between.

Chapter 2 provides detailed, user-friendly instruction on Essential Projects for the new urban gardener: starting a compost pile, outdoors if you have the space; or with worm bins if you live in an apartment or condo; mulching; installing drip irrigation and raised beds and controlling pests organically, to name just a few of the many projects covered.

This lengthy chapter is so meaty in substance (although perhaps fruitful would be a more appropriate descriptor!) and answered so many beginner’s questions I didn’t even know how to articulate, it is well worth the cover price of the book, several times over.

Urban Foraging — looking for and eating wild-growing food in the city — is the subject of Chapter 3, which also covers the fine art of dumpster diving.

Chapter 4 is all about that holy hallmark of the serious urban homestead, Keeping Livestock in the City (hint: think chickens, not cattle). Oh — another hint that is also a real estate knowledge tidbit: Roosters are illegal in most urban areas (due to their crowing), but you don’t need them unless you want chicks — hens will lay without a rooster.

Chapter 5 — Revolutionary Home Economics — is much less socialistic than it sounds; it’s all about preserving foods, making homemade beer and wines, breadmaking and housecleaning — all with natural, homemade products.

It also offers a fabulous section on house and apartment hunting for the wannabe homesteader. The final two chapter names are utterly descriptive: Be Your Own Utility: Water and Power for the Urban Homestead, and Transportation.

“The Urban Homestead” is a wonderfully simple, entertaining and plain English guide to the need-to-knows and what-not-to-dos of running a self-sufficient household in an urban area. It is beautifully designed and compact in a way that belies the massive amount of utility it contains; very like the small carbon footprint of the joie de vivre-packed lifestyle it describes.

I imagine my copy will sit on my kitchen counter for years, and I visualize that it will probably collect a smudge of soil here and there, or a drop of strawberry preserves over time. And that, I’d suspect, is just as the authors would have it.

Tara-Nicholle Nelson is author of “The Savvy Woman’s Homebuying Handbook” and “Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions.” Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

Borrower fears payments will skyrocket in 2011

Benny Kass
Inman News
DEAR BENNY: I have a hybrid mortgage that is fixed for the first five years at 4.25 percent, and is tied to U.S. Treasury securities. The loan document notes that the index value is 2.1 and the margin is 2.75. The first change date on the loan is Dec. 1, 2011.

My loan documents say that on the first change date my interest rate could be as high as 9.25 percent or as low as 2.75 percent, with no more than a 2 percent increase in any given year thereafter.

Given the current fixed interest rates, is it advisable for me to refinance the loan now or continue to take advantage of the low rate I am paying for another year? What is the likelihood that the “index” could reach 6.5 percent in a year raising my interest rate to 9.25 percent? –Molda

DEAR MOLDA: That used to be a tough question, but with mortgage interest rates currently at the lowest in history, I think there is only one answer: refinance. You may actually be able to get a new rate similar to your current one.

However, if you plan to sell your house within the next year or two, then it probably does not pay to spend money on a refinance loan. There is no guarantee how long these low rates will be with us, so I suggest that you contact your mortgage lender to start the refinance process.

DEAR BENNY: I recently learned that my home, which I purchased new in 1988, was constructed with Quest pipes. I wasn’t aware of the lawsuit that was created during that time. I was told that I have a leak in a pipe and the plumber would have to cut into several walls to find the leak. Do you have any current advice for property owners like me who were unaware of these pipes being used in their homes? –Linda

DEAR LINDA: Unfortunately, where a class-action is resolved, it usually relieves the defendant from further liability. You might want to talk with your attorney to see if he/she would be willing to pursue another lawsuit, although I seriously doubt it.

You just discovered the bad pipes, so any statute of limitations would normally begin at the time of discovery — and not when you first bought the house.

But, unfortunately, you will have an uphill legal fight. You could contact your homeowners insurance company and see whether it will provide any coverage. Otherwise, you will have to “bite the bullet” and pay for the repairs out of your own funds.

DEAR BENNY: Both of my parents died last fall, leaving behind a reverse mortgage that they also borrowed equity from. I am the administrator for their estates though our probate court. They did not leave wills.

I do have an estate bank account in my father’s name, which I am using to pay off some of his credit cards and real estate taxes and homeowners insurance. However, the estate owes a lot more debts than I will ever be able to repay from this estate account. My father receives a monthly annuity settlement check, which I deposit into the estate account, and these checks will continue for two more years.

The home will not sell for what is owed, because it needs many repairs. I don’t want the home to go into foreclosure, so I want to buy it as an investment. However, I qualify only for $119,000 on a second home. My siblings aren’t interested in the property because they have no income.

Can I use funds from my father’s estate account to pay towards the equity he borrowed before I buy it, so the home won’t cost me as much? By the time I buy the home, the settlement costs will be much higher than if I refinance through my own lender. I received a good faith estimate in March of about $125,000.

The home is appraised at about $135,000. The payoff to date is $116,000, but they will add servicing fees and settlement costs, which will put me way over the value of this home. What are my options? –Diana

DEAR DIANA: You should talk with an attorney who understands probate law. His/her fee may be a preference (a priority) under your state law so some attorney should be able to assist you.

You confused me with your question, and I suspect you are also confused. Your father died last year; are you sure that the estate is still legally able to collect annuity checks?

You also have siblings. And although they may not be interested in the house, they have the right to share in any proceeds that the estate will generate. They do have the right to disclaim any inheritance, but that’s a complicated legal issue that needs guidance from an attorney.

The bottom line: The reverse mortgage must be paid off. If your siblings agree (and subject to possible court approval), you may be able to use some of the estate funds to pay down that mortgage.

My suggestion: You may want to consider selling the house to a third party instead of burdening yourself with a second home. But please talk with professionals before any final decision is made.

DEAR BENNY: We purchased a condo four years ago and for the last two years we’ve had a problem with our upstairs neighbor. Their floor above our bedroom squeaks when they walk on it. We can tolerate it during the day but it is ruining our lives at night because we can’t get any sleep. The noise seems to be a problem only during the summer months when it is humid.

Our neighbor denies that there is a problem and the association did nothing to help us last year. According to our documents, quiet time is from 11 p.m. to 7 a.m. We have had enough of this and need to solve the problem.

My questions: Who is responsible for repairing the floor: the condominium association or the upstairs neighbor? And can we demand that it be done? We have a new board of directors and a new management company and they seem to be more sympathetic. –William

DEAR WILLIAM: Unfortunately, you are not alone. Too many new developments that were built in recent years have acoustical problems. And I suspect that your association legal documents define the floors as “units” and not “common elements.”

Do you have proof of the noise? While board members will not like this advice, I recommend that when you hear the noise in the middle of the night, call your property manager — and your board members — and invite them to visit your unit and hear the noise themselves.

Some boards will be cooperative and arrange to hire an acoustical engineer to provide a written report. The report will contain two things: (1) a summary as to the extent of the noise and (2) a recommendation as to how to correct the problem.

If your board of directors is unwilling to pay for this report, you will have to do it on your own.

I am sure that your condo documents contain language prohibiting noise in the units. Once you have the proof (and the engineer’s report), confront the board and remind them that they have a fiduciary duty to enforce the legal documents of your association.

You should also provide a copy of the report to your upstairs neighbor so that he is aware of the problem.

Often, the noise problem is resolved simply by putting carpeting throughout the unit. Suggest to your neighbor that before you get involved in a legal battle, he should understand your concerns and be cooperative.

Ultimately, you may have to retain legal counsel to assist you. Hopefully, however, now that you have a more sympathetic board (and property manager) you will all be able to resolve this problem amicably.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

For existing owners, liquidation can be bittersweet

Steve Bergsman
Inman News
Some 1,500 condominium units in Greater Downtown Miami were sold from April to June this year, reported an associate of mine, Peter Zalewski, a principal with Condo Vultures LLC in Bal Harbour, Fla.

All those units represented 1.8 million square feet and reduced the number of new condos under developers’ control to a mere 5,100 units.

About the only disquieting news in all of Condo Vultures’ data was that gross sales amounted to $584 million, or just $333 per square foot. The reason for the low pricing was that most of those units were sold at bulk sales. Or as Jay Steinman, a Miami attorney who has been in the middle of many condo sales, said, “That would be one guy buying 200 units, another buying 50 units, that kind of thing.”

The question is: Are bulk condo sales a good thing? The answer is, generally, yes, but it depends on where you live, what you own and how willing your bank is to let you be market-competitive.

Miami isn’t the only city with major bulk condo sales. In 2005, the last year before the real estate downturn, there were only eight bulk condo sales in the country with a value of $162 million, reported Real Capital Analytics. By 2009, the numbers jumped to 84 with a value of $856 million. Through June of this year, bulk condo sales reached 47 with a total value of $918 million.

“We have already hit the full year’s total of 2009 for bulk sales, but I was surprised there (weren’t) even more,” said Dan Fasulo, a managing director with Real Capital Analytics.

“So many of these things are caught up in foreclosure or distressed situations that sometimes they get re-capitalized or transferred to a new owner and we don’t see it. Other times, where a lender does a workout, the developer in some cases will lose the entire equity stake and then act as a reseller.”

In Greater Miami, bulk condo buyers are paying between 30-40 percent off the height of the marketplace for “A” properties, usually near the intercoastal waterway or oceanfront. Much bigger discounts — 50 percent or more to the height of the market — can be seen with properties further inland.

Mark Pordes, whose company, Pordes Residential in Aventura, Fla., negotiated the largest condo bulk sale in South Florida earlier this year, 146 units on Singer Island in Palm Beach County for $120 million, also did the 25-unit bulk sale at the high-profile Fontainebleau Sorrento in 2009 for $8 million.

“There are two kinds of bulk sales,” he explained. “The first is where you take all inventory down, everything that is remaining, and that is a close-out. The other is a carve-out. Let’s say a building has 100 units left to sell, but the developer or lender will do a mini-bulk of, for example, all the remaining two-bedroom units, leaving behind the one-bedroom or three-bedroom units. That’s done so there is no internal competition in selling the remaining units.”

Of course, if you were a unit owner in a building going to condo bulk sale, you are going to see the value of your investment reduced. That’s the bad news. On the other hand, your investment will get no appreciation until all the units in your buildings are sold, and that’s going to happen only if the remaining units are recapitalized at a lower price.

The other advantage to an existing condo owner is if you are living in a building with many unsold units, in a worst-case situation homeowners association fees could escalate ridiculously since there are few contributors or your condominium association could go bust.

A second unkind consequence of a bulk sale is the investors will put their newly acquired units back into the market at a percentage of the old market price, and that could put pressure on unit prices in what was once healthier condo buildings in the immediate market area.

This is where things get tricky, so much so that a logjam in condo sales has developed in specific markets.

“A little factor called ‘your lender’ comes into play,” said Steinman. “The lender expects to get its debt paid off through condo sales.”

If you as an owner want to severely reduce prices, the lender can’t get out of its loan. As a result, the condo seller can reduce unit sale prices only to levels that would be satisfactory to the lender.

“Lenders are saying, ‘I want you to sell at X plus Y so I can get paid off,’ but borrowers/developers are saying I can only sell at X,” said Steinman. “That’s why you are seeing so many bankruptcies. The banks are being adamant in that they don’t want the units sold at a low price.”

Nevertheless, most observers and participants believe bulk condo sales are a good thing because it sets a clearing price. For about two years, the problem in hard-hit markets was there were few deals because no one knew how to value these empty condos. Every new deal gives a clear indication of what prices should be.

“Everything was at inflated value,” said Steinman. “If that unit … originally marketed for $300,000 … is sold at $150,000, all of a sudden the price is meaningful. It is a price that can be financed and for the new owner it is at a price where the unit can be rented at a value that can cover debt service.”

Individual buyers following the ping-ponging of condo prices in bulk-sale situations shouldn’t be deceived into thinking they are going to get the same deals.

“If you think a buyer off the street is going to be able to pick up one of these individual units at the same price that an investor who bought 100 units did, forget about it,” said Fasulo.

“You can get something in South Florida at a significant discount to the height of the market, but you are not getting the investor discount, which is what many had hoped for and it is creating mass frustration among buyers in the market.”

Steve Bergsman is a freelance writer in Arizona and author of several books. His latest book, “After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade,” has been ranked as a top-selling real estate investment book for the Amazon Kindle e-reader.

Mood of the Market

Tara-Nicholle Nelson
Inman News
In the last week or so, I saw two films that inspired and evoked the crystallization of some concepts that had previously been very loosely percolating in my head about this economic and financial crisis in which our beautiful nation still finds itself embroiled.

First, I watched Demi Moore, David Duchovny and their faux family be implanted in a town by an ad agency that had elevated the stimulation of luxury goods lust to a science in “The Joneses.” The tagline? “They’re not just living the American Dream, they’re selling it.”

Then, last night I went to see the sequel to “Wall Street,” at long last. The tagline? “Money never sleeps.” In addition to the fact that I was fascinated by the first one, a little birdie who had screened the second one had told me it was heavy on the real estate intersections, and it didn’t disappoint.

From micro to macro — the mortgage troubles of individual homeowners, greedy house flips that fizzled, the plight of an individual real estate agent when the bubble burst, and the Wall Street-level causes and implications of the subprime mortgage market meltdown — real estate is a recurring theme in Oliver Stone’s retelling of the Great Recession in the context of the lives of two men and one family.

We all know that there are some significant things broken in our economy. Hence, the bailouts (for better or for worse), the Consumer Financial Protection Bureau, the stimulus packages, and so forth: all efforts to cure what ails our nation’s economy.

However, as I watched these films, and their content marinated alongside all my conversations and observations with real estate consumers over the last decade, it seems to me that even as we collectively struggle to regain our financial footing and heal our wounded wallets, the true depths of this crisis might actually originate in our minds.

While the government iterates on solutions to the industry side of the economic crisis, maybe we can take on the consumer side by addressing and revolutionizing what’s broken about how we Americans think about money.

And it is broken. You can tell by the sheer numbers of purported fixes that are out there. It’s the same way you can tell the common cold is still the bane of the human existence: the sheer number of remedies that are on the market, the drugstore shelf space these remedies occupy and the billions in revenues they generate.

Similarly, personal finance books, money advice, and the industry of gurus who spin it occupy a vast amount of square footage in the mindshare and bookstores of America. Americans are always looking for information about what to do with their money, which is somewhat amazing given the sheer numbers of people and media outlets that are constantly giving it to them.

You can also tell that the way we think about money is broken by the burgeoning new movements that are taking a stab at revolutionizing our money matters, rather than just managing them. There’s the New Frugality, the “Cheapskate” movement, and even the “frugalista” contingent, for those who identify as both posh and cheap.

There are the urban homesteading and farming movements, with their focus on barter and self-sufficiency. There’s even the movement among billionaires to give massive chunks of their wealth away.

But all these gurus, books, shows and even movements have one common glitch that prevents them from serving as a cure to the root cause of America’s money problems: They are tactical. They are too much about what to do with your money, and not enough about how to think about money.

As long as the thought process is broken, all the tactics in the world are just Band-Aid after Band-Aid on the oozing economic cancer we’re just barely surviving.

We’ve got a herd-mentality problem — this was the central issue of “The Joneses.” We’ve also got a crisis of excessive consumption — as individuals, families and a nation — disproportionate to what we produce and innovate.

Many, many of us have a deep degree of financial immaturity — this is why the unsustainable “it’ll always go up” real estate fallacies were so popular over the last decade. And this is not me just pointing a finger — I’ve certainly observed and addressed many of these issues in my own world.

It seems to me that the largest shared financial value Americans have is an unspoken one, which Oliver Stone had one character in the “Wall Street” sequel articulate quite clearly. When asked what “his number” was — defined as the amount of cash that would make him comfortable retiring — one alpha trader in the film wryly smiled and growled: “More.”

And that value of nothing more than “more” clearly isn’t working for us. So, for the next seven weeks, we’ll explore some of the mental shifts I believe Americans must make to deeply, fully resolve and avoid repeating our current national financial drama. These are not tactics, though tactics can flow from them — we’ll be talking about philosophies, values and morals around money.

And maybe, just maybe, you’ll read something or share it with someone that will spark you, or them, to shift your consciousness about money.

Tara-Nicholle Nelson is author of “The Savvy Woman’s Homebuying Handbook” and “Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions.” Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

Key factors make this recession different

Jack Guttentag
Inman News
In past recessions, the housing and mortgage sector, stimulated by the lower interest rates generated by an easier monetary policy, was a source of strength that led the economy out of the recession. Not this time.

Despite the fact that the easing of monetary policy has been more aggressive than in any prior recession, and included unprecedented purchases of mortgage-backed securities by the Federal Reserve, the spark has fallen on wet grass.

Sales of new and existing homes are lower today than at any time in the last decade. House prices have not rebounded as expected. The volume of mortgage refinances has fallen far short of predictions based on past relationships.

Why has monetary easing failed to do the job this time? In a recent article, I pointed out that the interest rates that mortgage borrowers actually pay have not declined as much as published rate series suggest because so few borrowers qualify for the lowest rates. Published rate series have a downward bias because they don’t cover potential borrowers who are priced out of the market.

While interest rates on prime loans have declined, the rate penalties for less-than-prime conventional loans (those not FHA or VA) have increased.

One illustration: Before the crisis, the FICO score of borrowers taking loans with 70 percent loan-to-value ratios could be very low without affecting the rate. Today, a borrower taking a 70 percent loan needs a FICO score of 740 to get the lowest rate, with a score of 640 the rate will be 0.5 percent to 0.625 percent higher, and with a score of 600 conventional loans are not available at any price.

This can be largely attributable to the post-crisis policies of Fannie Mae and Freddie Mac, as noted below.

In addition, underwriting requirements have become extremely tight. Minimum credit scores have been raised, maximum ratios of loan amount to property value (LTV) have been reduced, and documentation rules have become much stricter. Full documentation has become the rule for every borrower, and underwriters no longer have discretion to use their judgment in difficult cases.

The impact of these changes has been reinforced by a pervasive downward bias in appraisals, a complete turnaround from the upward bias that prevailed before the financial crisis. Where a reported 90 percent LTV before the crisis was probably closer to 95 percent, today it is closer to 85 percent.

The turnaround in appraisal bias is a key to much of what has happened. Expectations of lenders and investors have done a 180-degree turn, from unbridled optimism that home prices will keep rising, thereby validating liberal lending terms, to hesitancy and caution lest the period of home-price declines not be over. Much of the tightening in lending terms reflects this major swing in expectations.

The same thing happened in the early 1930s, except in that period mortgage lending came to a complete halt because there were no federal agencies supporting the market — they had yet to be created.

The recent financial crisis, furthermore, transformed the housing finance system in some fundamental ways that have made the system less responsive to monetary easing by the Federal Reserve.

First, the private mortgage-backed securities (MBS) market imploded, leaving only markets in securities guaranteed by the federal government. Conventional mortgage lenders are now almost completely dependent on guarantees from Fannie Mae and Freddie Mac to be able to sell their mortgages.

Second, those agencies have made extensive use of the representations and warranties provided by lenders doing business with them to require the repurchase of loans made in pre-crisis years that have gone bad.

As a result, in order to avoid possible violations that could trigger buybacks in the future, lenders today impose more restrictive underwriting rules than those of the agencies.

Third, the crisis eliminated some large mortgage lenders, including Countrywide, Washington Mutual, Indy Mac and Wachovia. These firms were heavily into third-party originations — acquiring mortgages through brokers and small lenders, and selling them into secondary markets. This has left significant market power in the hands of the three remaining behemoths serving this market: Wells Fargo, Chase and Bank of America.

Insiders tell me that the market power of these firms is enhanced by the lower guaranty fees they pay to Fannie and Freddie relative to the fees paid by smaller firms. I am also told that the behemoths are enjoying profit margins many times larger than those that were common in third-party originations before the crisis. Larger margins are embedded in the rates paid by borrowers.

Finally, the crisis wiped out the capital of Fannie Mae and Freddie Mac, which on Sept. 6, 2008, were placed into conservatorships. The Federal Housing Finance Agency (FHFA), which had been their regulator, was appointed the conservator. Its charge was to “preserve and conserve the company’s assets and property and to put the company in a sound and solvent condition.”

The agencies have followed this charge exactly, posting prices and underwriting rules designed to maximize their net revenue. If their income statements separated out operations since conservatorship, the agencies would be extremely profitable.

This fact is obscured in the actual statements, however, because large profits on current operations are swamped by losses on loans purchased before the crisis.

A major consequence of revenue maximization by the agencies is that there is a very sizable group of borrowers who are current on their existing loans and should be able to refinance or buy homes but can’t. Either they can’t meet draconian underwriting rules, or they are priced out of the market by the heavy penalties imposed on less-than-pristine mortgages.

Two strategically important groups have been particularly hard hit. One is the self-employed, who are predominantly the small-business owners who are a major potential source of employment growth. The other group comprises investors who buy homes to resell at a profit, and who are desperately needed right now to buy foreclosed homes sold by lenders.

Thanks to Alan Boyce. A future article will discuss how to remake the agencies into team players.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

Avoid penalty fees when it’s time to sell

Dian Hymer
Inman News
Having work done to your home without going through the local building department permit process saves you permit fees and the hassle of meeting city inspectors to approve and sign off on work.

If you make changes in your plans along the way, this can involve further design review. But, it can cost you money if you end up with a remodeled home that won’t appraise for the price buyers are willing to pay when it’s discovered that the work was done illegally.

Some planning departments won’t issue a new permit if there are any outstanding permits that did not receive final approval from the city inspector. Buyers, who discover this after they’ve closed on the house, will have to make the corrections before they can move forward with their plans.

Sometimes buyers are issued a permit, and while a city inspector is at the property he notices something unrelated to the work that was not done with a permit. The new owner then has to have that work corrected before receiving final approval on the project. These situations can lead to legal actions that are best to avoid.

Check with your local planning department if you want to make changes to your home and find out what, if any, building permits would be needed to ensure that the renovations are legal. But, you can’t stop there.

Several homeowners in Oakland and Piedmont, Calif., recently ran into problems regarding permitted work when they decided to sell their homes. They assumed that when the city inspectors visited the property and gave the OK on the job that permit requirements pertaining to their renovations were complete and approved.

One homeowner, who was planning to sell, noticed that the square footage of the home that showed on the “public record” was about 900 square feet less than the measurement an appraiser came up with. The “public record” information is accessible to real estate agents, appraisers and to buyers surfing real estate Internet sites looking for new listings.

The seller went to the local planning department and discovered that a permit for a sizable addition done by the previous owner had not received the final approval from the city. Fortunately, the previous owner had given the original permit for the addition to the current owner.

It had been given final approval by the city inspector. The issue was that the city inspector failed to document this in the city records.

This situation was resolved relatively painlessly, although the current owner had to pay additional permit fees in order to have the planning department update its records. The addition was reflected in the livable square feet so that the property sold at a price that reflected its size and there wasn’t an issue with the lender’s appraiser. Without the additional legal square footage, the house would have sold for much less.

HOUSE HUNTING TIP: Don’t assume that the local planning department’s permit history of your property is accurate. After your renovation is complete, make sure that the planning department has updated its records to reflect that all the permitted work done on your home received final approval.

Don’t wait until you’re getting ready to sell to find out that there are big voids that need correcting. Keep the original permits and give them to the buyers when you close.

Buyers should check the permit history during the inspection contingency time period to make sure that there aren’t any red flags. Be sure to ask the sellers for copies of any building permits they have and to disclose any work they did without permit.

THE CLOSING: Just because work was approved and permits were issued does not guarantee that the work was done properly or to code. Inspectors can miss things.

Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of “House Hunting: The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide.”

Home Sale Hindsight

Tara-Nicholle Nelson
Inman News
Q: Since I don’t have a large downpayment, is a seller-financed deal a better way to get a house sale done? I have a home I own free and clear that I want to rent out and have it pay for my next home. What would you recommend?

A: Seller financing both is and isn’t the panacea to the challenges involved in financing a home that so many people think it is. With a seller-financed transaction, many of the seemingly technical, formal, tough-to-complete requirements imposed by institutional mortgage lenders are potentially eliminated.

Downpayments, appraisals, condition requirements, even title insurance and private mortgage insurance — seller-financing provides a means to escape the burden of these requirements.

Well, kind of. While sellers can offer to hold a note or carry back financing on a home on terms that are more attractive to the buyer, for whatever reason the reality is that most sellers either (a) have an existing mortgage they need full payment to pay off, or (b) need at least a very large upfront payment to move on to the next phase of their lives, and to make it worth their while to forgo full upfront payment and the closure of being done with the property.

So, in addition to the fact that seller-financing is simply not that frequently available, the sellers who are willing and able to finance the sale of their homes often require more of a downpayment than a corporate lender, not less.

Additionally, many of the seemingly burdensome guidelines and requirements imposed by institutional mortgage lenders are actually safeguards that protect the interests of not only the lender, but also the buyer/homeowner.

Title insurance ensures that the seller has the legal right to sell you the home, and offers you some financial protection in the event there are defects in the title.

The title search conducted by the title insurance company before closing can also prevent a buyer from making a downpayment on a seller-financed transaction to buy a home that is mortgaged beyond any hopes of being paid off out of the current transaction, or even worse, is soon to be lost to foreclosure.

The appraisal process — warts and all — does provide for a professional evaluation of a home’s value. Even though the disconnect between appraised value and purchase price can be the bane of a buyer’s existence when the buye is trying to secure a mortgage, in the context of a seller-financed transaction an appraiser’s opinion of the home’s value can prevent a buyer from making an uninformed decision to dramatically overpay for the home.

Also, buyers of seller-financed transactions need to be proactive and personally ensure that their post-transfer deed is filed with the county recorder’s office. Otherwise, the seller can continue to take mortgages out and even lose the home in foreclosure.

There is a long-persistent fallacy/fantasy among Americans that owning one home can and will pay for the next. While it is possible, it is also outdated. That was more feasible in the decades when home prices and the total costs of ownership were much lower than they are, even in their currently, relatively low, post-bubble state.

Before you fall into this fallacy, get extremely nit-picky with your calculated income and expense projections.

If your current home cannot produce sufficient cash to pay for the downpayment on your next one, then it isn’t truly paying for the next home. If you think the rental income from the one will cover your mortgage payment on the next, that’s certainly possible, but make sure you account for the rental income to cover that home’s maintenance, repairs, property taxes, and hazard insurance.

Also — in an ideal world — build up a reserve account in case you have a few months of vacancy, a few months were the tenant doesn’t pay, and/or a situation in which you need to evict a tenant. It happens. I’ve certainly seen many a landlord have their personal finances derailed by having to pay legal fees for an eviction.

So, what’s my recommendation? Certainly keep an eye out for seller-financed opportunities but more importantly, keep an ear out for people you might know who need to offload a property and are willing to do so with little or no cash upfront from you.

And, if you do end up trying to use seller-financing for your next home, retain a local real estate attorney who can help you take the needed precautions.

Also, before you decide that your current home can pay for the next one, do some meticulous cash-flow projections on it to ensure you’re not getting yourself in over your head, and consider taking a year or so to save up some reserves.

Tara-Nicholle Nelson is author of “The Savvy Woman’s Homebuying Handbook” and “Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions.” Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

Tara-Nicholle Nelson
Inman News
Q: We keep hearing everywhere that interest rates are “historically low,” but no one I know seems to be able to qualify to get the 4.4 percent we keep hearing and reading about. How do you qualify to get the lowest rates? What do you advise a financially fit person to do to increase her credit score or make herself a more attractive buyer?

A: Last week, we discussed what it takes to qualify for the very best interest rates. Now we turn to tips for increasing your credit score, even if you’re already pretty fiscally fit.

I’ve found that people asking about how to qualify for the best interest rates is similar to people asking me how to lose weight: I tell them the truth, then their eyes glaze over when I give them the straight dope, sans magic bullets.

No one wants to hear: eat vegetables, cut the sugar, and exercise; similarly, they don’t want to hear: pay your bills on time, every time. But I’ve been asked this question a lot recently, so here goes, anyway!

1. Pull your reports online — get them for free, no strings attached, at the government-authorized website AnnualCreditReport.com. This doesn’t get you your actual FICO scores, but it does get you the content of your report.

Look for errors that could be depressing your score, like accounts that don’t belong to you, balances that are actually lower than reported, old debts that are paid off that should have been removed entirely (seven years for credit cards, 10 years for bankruptcies).

2. Consider reopening accounts you thought were open but have been closed because you haven’t used them in so long — it will help boost your utilization ratio, one element of your credit score that is dependent on how much available credit you have.

3. Pay down some debt. This both decreases your debt-to-income ratio (36 percent is the goal, including the proposed mortgage payment) and increases your credit score, if you do it right (see the next tip).

4. Don’t close any accounts. Instead, spread your debt out. The ideal utilization ratio is about 20-30 percent of your available credit overall, and on any given account. Closing accounts reduces the amount of credit that is available to you, so it makes it look like you’re closer to being maxed out.

So if you have one card that’s near its max and several others that have zero balances and you’re trying boost your score a bit, quickly, consider balance transfers to spread our your debt more evenly, aiming for 20-30 percent of the available credit on each card.

5. Use your credit regularly — and pay it on time, every time. FICO scores are not simply about making sure you have no debt. They are meant to be a measure that shows that you have a history of responsibly using and managing and repaying your debt.

6. Finally, check in with your mortgage broker. Have the broker pull your report and score, as the report she pulls is the one she’ll have to go by in the final analysis. If you’re really close to a score level that would empower you to qualify for a lower rate, the mortgage broker can actually run a credit diagnostic on your score and generate some recommendations for which actions you could take to raise your score by the needed few points.

Also, many mortgage brokers can do what’s called a “Rapid Rescore” — once you’ve paid that bill off, they can actually submit a request directly to the credit bureaus to update that information and your score in just a few days.

None of these tips will get someone with a 500 credit score to a 700 (other than a massive debt reduction program). But if you’re trying to get a little boost to get you over a credit score hump, these can be potent and save you beaucoup bucks in interest.

Tara-Nicholle Nelson is author of “The Savvy Woman’s Homebuying Handbook” and “Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions.” Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.