Tips for First-Time Home Buyers
Your family or friends have been telling you to buy a home. So you weigh the pros and cons of having your own and decided that home ownership is the best decision. Congratulations, you just passed a major hurdle! Now what? Buying a house for the first time can be challenging. There are a lot of things you need to consider so start asking questions and consider the following tips:
- Define your goals and have a pretty good idea of the type of home and neighborhood you want. Look at your needs and your preferences in terms of commuting, shopping, recreation and other factors that are important to you. You can read through my previous post “Checklist for home buyers” for details.
- Check your credit. Make sure your credit card bills, loans, rent and other bills on time. Having poor credit makes you a big risk to lenders which translates to higher rates and steeper mortgage costs.
- Examine the different financial options which are available to you – FHA, VA, state backed-loan programs which require little down and have liberal qualifications standard
- Qualify yourself. Get pre-approved for a loan so that you generally know how much you can borrow, what you can afford and so owners see you as a serious buyer.
- Plan on getting a home inspection as part of any offer you make. This will help you understand the condition of the property and the repairs you are likely to face.
- Consider property taxes. When you buy a home, mortgage interest and property taxes are generally deductible from income taxes. While monthly housing costs may be larger when you own than when you rent, what you save in taxes can make up some or all of the difference. Talk to a tax professional.
- Partner with a broker. Real estate brokers are the center of most property transactions. It is important for you to understand what the broker does, who is represented, and how the brokerage system works.
Checklist for Home Buyers
Are you looking for a property to purchase? Do you know what kind you need / want?
As a realtor, I work with different clients. And when I say different clients I mean different preferences, different priorities, different budgets. Over these years, I learned that the best way to match the buyer to a property is to really understand what the client needs or wants so I intereview them before anything else. To help you and your broker narrow down your search for that dream house, allow me to share some of the questions I ask my clients:
- What is your price range?
- Desired cities
- Schools
- Number of bedrooms, bathrooms, garage, fireplace
- Will you be paying in cash or will you be financing the home?
- Have you been pre-approved by a lender?
- Do you know the interest rate? When were you pre qualified?
- Are you working with a Realtor? For how long? If so have you signed an agreement
- Do you currently own or rent?
- If you own, is your home currently on the market?
- If rent, when does your lease expire?
- How long have you been looking for?
- Have you found anything you like?
- What stopped you from buying it?
- How soon would you like to move?
Costs Associated with the Sale of a Property
When selling your home / property, you should be aware of the costs involved. As the seller, you are responsible for the following costs:
- Broker’s Commission
- Title Insurance
- Listing Company Administrative Fee – $225
- Document Recording Release Fees – based on the number of pages of documents
- Illinois State and County Transfer Tax -$1.50 per $1000 of purchase price
- Attorney’s Fees – average of $400-$700
- Escrow Charges – only if the escrow is established
Find the right apartment
Six helpful tips that can help you find the right apartment.
- Start early. If you have been renting for quite some time now, you know that searching for that perfect apartment can take a lot of time. Start looking for an apartment before you actually need it.
- List down your priorities in finding an apartment – e.g. budget, number of rooms, location, etc. Your list will help you keep focused on what you actually need.
- Take time to compare apartments. If you are viewing several apartments, it would be helpful to take notes. List down what you liked about it so as not to lose track of what you saw.
- Check the average rent prices for apartments in the area.
- Consider other possible expenses such as utilities, water, transportation or parking and food.
- Have your deposit ready – if someone else gets their deposit in first, you could lose out on a great apartment.
For Sale by Owners
Selling your own house without the help of a real estate broker can be tough. To help you through the process and make sure you cover all the bases in marketing your property, here are some tips.
- Set a timeline. Have a target date for selling the house. If in case you will be unsuccessful in meeting that target date, determine the date when you will give the listing to a broker or take the home off the market. This is your back-up plan.
- Before you advertise, make sure the house is clean. You want to encourage buyers to see the potential of your property, not scare them away. So tidy up the yard, clean the interior, de-clutter the closets and clean the garage.
- Have a decent FOR SALE sign. Check out your hardware store for this or pay a sign company to make one.
- Be realistic with your asking price. Some brokers offer to do a free, no-obligation market analysis of comparable home sales in your area in the hopes of getting that listing. Take their offer! It is a great tool to help you set your asking price and a good way to establish contact with brokers.
- When putting out a newspaper ad, it should begin with “By Owner”. Put the address, asking price, number of rooms, and special details such as hardwood floors, granite counter, etc. Include day and evening contact numbers. It would also help if you have an answering machine.
- Prepare an information sheet for prospective buyers. Include details about each room, appliances, special assets, lot size, neighborhood, school districts, taxes, and the like. Include a photo of the home’s exterior when the yard is at its best. Also, be ready with a seller’s condition report specifying the condition of the home’s structure and it’s mechanical, electrical and plumbing systems.
- During an open house, remove distractions – send your kids and pets to your neighbor. Turn on all the lights, make sure the house smells nice, and put out fresh flowers and new towels.
- Get names and contact numbers from everyone who looks at your home. Offer to make them exclusions to any broker’s contract you might enter into later on. After someone sees your home, phone a day after to ask if he has any questions. If you reduce your asking price or have received an offer, phone everyone who has seen the house to alert them of these new developments.
- Set aside your emotions when negotiating the price of the house and be creative when bargaining. For example, get your way to on the closing date, offer to include the refrigerator.
- Be cautious of offering a land contract or help with seller-financing to strapped buyers. Do a credit check on interested bidders. Require them to divulge their occupation and employer, household income, major debts, and proposed down payment.
- Hire a lawyer for closing.
If you are overwhelmed by the home selling process and you feel that you are ready to partner with a professional, please don’t hesitate to call me at 773-865-8575 or email at info@chicagoprimeproperties.com
Investing on Foreclosures, Is it for you?
Foreclosure properties can be a good place to invest your money. However, potential investors should take precaution because there are some deals out there with little or no money down but can involve significant risks. Here are 3 ways to invest in foreclosure properties.
The first approach, also considered as the most popular, is to purchase a property, fix it up and then rent it out. This approach creates (most of the time) positive monthly cash flow for the investor as he / she becomes the landlord.
The second way is to seek out and buy foreclosures or “handyman” specials, invest more money to fix or upgrade the property and then sell for a higher value for profit.
The third approach is to purchase a foreclosure that is underpriced and selling it immediately at a higher value.
Now how do investors sell homes for a higher value? One way is to take back a mortgage. For example, a house worth $100,000 is sold to an investor at foreclosure for $50,000. The investor makes a 10% downpayment on the property and assume or create a new mortgage for $45,000. The investor then advertises the property at a discount price of $80,000, offering 100% seller financing. By underpricing the house, the owner creates a sense of urgency to pull in buyers. If successful, the investor takes a promissory note from the new purchaser for $80,000. He has now created a $35,000 note for himself (The difference between $80,000 sale price and the original mortgage of $45,000). The new buyer makes payments to the investor for an $80,000 loan and the investor makes payments on the original loan for $45,000.
If the original loan is for $45,000 at 8% over 30 years, the principal and interest is$300. When the second buyer takes a note for $80,000, the investor may charge higher interest since he’s offering 100% financing.
Let’s say he offers the $80,000 loan for 9.3% over 30 years. The monthly payment is $620, creating a positive cash flow of about $320 per month.
If the borrower stays in the house for 30 years, the investor will make $115,200in interest and $35,000 in capital gains after he’s paid his own interest on the first note for a total return of $150,200. Not bad for a $5,000 down payment.
Keep in mind that not all mortgages allow an owner to “wrap” a second mortgage onto an original loan. Most loans today contain a “due-on-sale” clause, meaning if the property is sold, the first trust must be paid off immediately.
Before you decide to invest in foreclosure properties, be sure everyone (be it your spouse or other investors) understands this form of investing including the nature of this business including high finance, property management, calls in the night from tenants and other risks that regular home owners never experience. Before diving into this new world, consider the following:
1) Get educated. There are plenty of real estate agents and auctioneers who do this on a daily basis and would be happy to educate you in the world of foreclosure properties. Read on guides written by reputable authors who know investment intricacies.
2) Be realistic and manage your expectations.
- not all foreclosures are good deals
- not all foreclosed properties are available at a discount
- if you take back a loan your buyer could default
- most loans prohibit wraparound financing
- repairs might be far more than what you expected
- not all tenants pay their rent on time
- some renters damage property
- changing interest could impact your bottom line
- it may not be possible to re-sell the property without excessive and costly repairs
- not every deal yields a profit
- if you have profit you may face taxes
- if you only look at foreclosures you may miss other investment opportunities
3) Get professional help from brokers, lenders, attorneys, accountants, home inspectors and others.
The Road to Housing Recovery 101: $8,000 for downpayment or closing costs
Homebuyers once again can avail of a new incentive. The $8,000 Federal Tax Credit, for those who purchase a primary residence before December 1, 2009, can now be used towards closing costs, buying down their interest rate or increase the minimum 3.5% downpayment for FHA loans. The up to $8,000 credit, which has no repayment clause, is also available to those who haven owned a home in the last 3 years.
You can find more from the Housing and Urban Development, by clicking on this link… http://www.hud.gov/news/release.cfm?content=pr09-072.cfm
This is definitely good news for both buyers and sellers. We expect to see positive results soon. Please email me at info@chicagoprimeproperties.com if you would like to receive additional information on how you can benefit.
Banks Under Fire-Part 2
The loose underwriting standards in home mortgages coupled with the shifting of risk perpetuated a venue for incubating moral hazard. The consequences were destructive to on and off balance sheet of banks.
As a Qualitative Asset Transformer (QAT), banks are rewarded for mismatching the two sides of the balance sheet- assets and liabilities or loans and deposits, and these create risks. As typically, the bank’s assets has greater credit risks than its liabilities. However, in recent years it has reached an unprecedented level, an example of which is when Moody’s Investors Service announced that it’s raising its loss expectations for US subprime residential mortgage-backed securities issued between 2005 and 2007, as it believes, without intervention, nearly all already-delinquent loans will eventually default.
Also, bank’s assets have usually longer maturities than liabilities, creating interest rate risk. These risks were inherent during the period of 2002-2004 when the federal funds target rate was in the average of 1.25% and loans that are adjustable rate mortgages (ARMs) were prone to prepayment.
Lastly, a bank’s liabilities are more liquid than its assets. When a depositor demands his money without notice, while the bank’s assets, such as loans cannot be traded in an active market, there is a liquidity risk. As what recently happened with the largest bank failure of Indy Mac Bank in summer of 2008, due to their enormous exposure in exotic/option loans, depositors doubted the bank’s viability, thus they withdrew their money. Similarly, the seizure and sale of Washington Mutual to Chase and Wachovia to Wells Fargo are examples of liquidity risk. These banks were required to mark-to-market or estimate the fair value of their assets, particularly the mortgage backed securities, at a time where the market for these assets were not active.
Over recent years, the rapid growth of banks’ off balance sheet exposure can be attributed to deregulation, technological and financial innovation. This has provided enormous opportunities, nevertheless it created a competitive environment. Most profits from conventional on balance sheet activities have been diminishing, thus banks have approached it aggressively in an effort to keep relationships with current clients intact and to increase fee income from other sources.
The most controversial of the bank’s contingent claims are the credit default swaps. The CDS market exploded over the past decade to more than $45 trillion in mid-2007, according to the International Swaps and Derivatives Association. This is roughly twice the size of the U.S. stock market (which is valued at about $22 trillion and falling) and far exceeds the $7.1 trillion mortgage market and $4.4 trillion U.S. treasuries market, notes Harvey Miller, senior partner at Weil, Gotshal & Manges.
These insurance-like contracts that promise to cover losses on certain securities in the event of a default have been difficult to value lately. What makes it more challenging is that at this time, most banks wrote down their mortgage related securities.
Considering that the banking industry is in turmoil, public regulatory agencies, including Federal Reserve, Office of the Comptroller and Currency, Federal Deposit Insurance, needed to step up. It has been criticized that during good times, when profits were flowing, rewards have been privatized, but now that inefficiencies in the financial markets exist, risks have been nationalized. Most of the risks inherent in the lending industry are now being absorbed by the government. This scenario creates moral hazard, as it signals that a party shielded from risk may behave differently from the way it would behave if it were fully exposed to the risk. The idea that financial institutions did not bear the full consequences of their actions, as they acted less carefully than they otherwise would, leaving the government to bear the responsibility for the consequences of their actions.
Endnotes:
-Basel Committee: The management of banks’ off-balance-sheet exposures: a supervisory perspective. Bank for International Settlements. Bis.org. March 1986
-Morrissey, Janet. Credit Default Swaps: The Next Crisis? Time.com. March 17, 2008
-Curran, Kelly. Subprime-Mortgage Defaults to Surge: Report. Housingwire.com. Feb 26, 2009
-FDIC Announces Plan to Free Up Bank Liquidity. Creates New Program to Guarantee Bank Debt and Fully Insure Non-Interest Bearing Deposit Transaction Accounts. October 14, 2008
-Zacks Investment Research. The Moral Hazard Of Bailouts. Dailymarkets.com. February 19, 2009
-FDIC Announces Plan to Free Up Bank Liquidity. Creates New Program to Guarantee Bank Debt and Fully Insure Non-Interest Bearing Deposit Transaction Accounts. October 14, 2008
*If you would like a full copy of the study, please email me at info@chicagoprimeproperties.com*
