Step 3 to Purchasing a Home

Following the thread of the last 2 entries, I will now expound on step 3 to purchasing a home. Step 3 is where you tell your buyer's agent exactly what you're looking for. We do an assessment of wants and needs. What are your goals for buying a home? Do you want a single family home, condo, townhome? How many beds and baths do you need? Is square footage or lot size important to you? Do you need a garage? How important are the age, style, neighborhood, schools, etc? Refining the search is most important in buyer's market like the one we're in now. There's too much to choose from. You should be able to find exactly what you want. That will change when we move to a seller's market. Buyers will be so accustomed to having so much to choose from, they won't believe it when the agent tells them that there's only 3 homes in their price range to choose from and they can forget about all the other parameters.

Once we know more about you and your family and what you're looking for, we can search the MLS and find a list of homes that match your criteria. Moreover, we can set up an automatic search that will notify us by email as soon as any new listing comes on the market that matches your criteria. This automatic notification is extremely important in a seller's market so that someone else doesn't beat you to the punch. I've started to slip into step 4, so I'll save that for next time.

Step 2 to Purchasing a Home

As stated in the last entry, I am going to go through the 10 steps on my guide to purchasing a home. Last time I talked about getting a buyers agent. Step 2 is to get a lender and get qualified. Make sure you start talking to lenders before or while you start looking at homes. We can suggest some that our clients have had success with. Your lender needs to figure out how much you're qualified for and what kind of rate that your credit score is going to give you. This is going to have the biggest effect on your monthly payment. The lender that does this can also give you a prequalification letter. You are not obligated to ultimately use that lender. You may choose another later. But having a prequal letter is almost a prerequisite for making an offer on a home these days. For good realtors, it's a prerequisite for them showing you property. Ultimately, it also makes your offer stronger than someone who is not prequalified.

Choosing the right lender can save you a lot of money. A good buyer's agent can certainly save you lots of money during the negotiating process. It's up to you to negotiate with the lenders until you get one that you're comfortable with and one that is willing to cut their fees to help you. From my experience, they will never give you their best deal the first time. Kind of like a car dealer, you have to haggle. I know it's a pain, but a lower interest rate can save you money every month for 30 years!! That adds up. Not only that, but they will also negotiate their fees. They have ways of cutting the application fee, the appraisal fee, the credit report fee, the origination fee, etc. Here's how you do it. You must go to a minimum of 3 lenders. Get a quote from the first one and take it to the other 2. The quote is called a good faith estimate. The other 2 will beat the first one. Then you take those 2 back to the first one, and so on. You can do this a couple or 3 times until they run out of negotiating room. During this time, you will get a feel for who you can trust. Also, require them to give you quotes on the exact same kind of loan with the same parameters. They will try to play with attorney fees and insurance fees to make their quote seem better. These fees for other things are on their good faith estimate. Make them all play by the same rules by using the same numbers for the fees that aren't theirs. Having said that they should all play by the same rules and use the same kind of loan, let me say that some lenders can be more creative than other ones. There are some great programs out there for first time buyers, teachers, doctors, etc. All my lender friends are going to hate this blog. They don't want you to know that you can negotiate.

Step 1 to Purchasing a Home

I wrote up a guide for first time home buyers to guide them through the process of buying a home. We use this in our office for our first-time home-buyer class. There are 10 steps in all. You can find that document on my website, www.charlestonhoLmes.com. It's a very rough outline and the buyer is encouraged to ask questions of his realtor if he is unclear on any of the steps. I thought I would use the Blog to expand a little on the 10 steps.

The first step is to find a Qualified Buyer's Representative. In recent years, most states have changed their laws regarding agency and now allow the buyer to be fully represented by their agent even though the seller pays the commission. That agent is known as a Buyer's Agent. Before this change, a buyer's agent represented the seller and the buyer had no real legal representation during negotiations. Most states realized that this was unfair and we now have full representation for the buyer. All the buyer has to do to get this free representation is sign a document making one agent the exclusive agent for that buyer. This document can certainly have an expiration date on it. There is simply no good reason whatsoever for a buyer not to have his own Buyer's Agent. There is absolutely no downside to having a Buyer's Agent. And it's free service!! The Buyer's Agent gets paid from the seller's proceeds, but has a legal duty to protect the buyer during all negotiations.

So, don't call 15 different listing agents about their listings. Get yourself a Buyer's Agent and let them do all the work for you. They can set up searches in the MLS based on your criteria that will send you email notifications of properties that match your parameters. They can show you all the properties that you want to see. We have access to the entire MLS. They will write the contract for you with all sorts of special clauses designed to protect you more than the standard contract. They will negotiate with the listing agent on your behalf, help you find a lender, set up home inspections, handle all of the paperwork, set up closings, and make sure everything gets done. Remember, they are not trying to sell you a home like a listing agent; they are trying to help you buy your dream home.

Well that's step one of the 10 steps. Now a plug for myself. I have the ABR designation for realtors. This means that I'm an Accredited Buyer's Representative. That designation comes from REBAC, the Real Estate Buyers' Agent Council, a subsidary of the National Association of Realtors.

Current market conditions

Lots of bad press out there right now about how soft the real estate market is. Well, I just read some interesting statistics that support our feeling that there are plenty of buyers out there. In 2002, SC home sales set a new record at just over 43,000 homes sold. Over half of our metropolitan areas showed price gains over the previous year, with the median price at $152,000. At that time, homebuyers were confident that the real estate market was strong and healthy. In 2007, existing home sales are forecast to be close to 58,000, with the median price holding strong at $160,000. Both 2002 and 2007 show strong sales. 2006 was the third best year on record for real estate sales in South Carolina. 2007 will most likely rank as the sixth best year on record for sales.

So, there are plenty of buyers out there. The problem is that there are too many sellers and too many unmotivated sellers with overpriced listings. These simply need to come off the market. Realtors need to refuse to put overpriced listings on the market.

Average Real Estate Investment Return

Everybody knows that real estate investments typically increase in value at a rate of about 7%. But what you need to understand is that is an average. It doesn't increase 7% every year. Lots of times it won't increase at all for 3 years and then it'll go up 28% in one year. So, it went up 28% over 4 years for an average of 7%. You need to buy when it's in one of those slumps where its not going up much and be ready to sell just after one of those surges. Now seems to be one of those slumps where prices are just staying steady. Buy now! And then make sure you position yourself where you can sell when you want to, just after some price surge several years from now.

I Wish I Had Bought When ....

Ever heard people say, 'I wish I had bought when ...?' They look back and reget not having bought when there was an obvious buyer's market. Hindsight is 20/20. Now is one of those times. Same thing with the stock market. You should buy stocks and homes when things seem the worse. You're buying on the dips. Not everyone has the courage to do this. Many people made the mistake a couple of years ago of buying on the high when there was all that euphoria. That's obviously when you want to be a seller. Others think that the price may actually go lower. Let me know when you've figured out how to locate the bottom of the dip. What should sellers do? They should sell if they need to and they are planning on buying something else. They may not get the best deal on what they sell, but they're going to get a great deal on what they buy. You can't have both.

Dropping Prices

Every buyer seems to be waiting for the prices to fall further. That may happen. However, on a lot of properties, it won't happen b/c the seller is at rock bottom already. Many sellers have taken equity out of their homes over the years and how as much or more than the home is now worth. Many tried to sell last year, but they were greedy and didn't try hard enough. Now, with prices falling, they have reduced their price to the point that they can't go any lower. Many can't even negotiate the listing price that they are currently at. They have come all the way down to the point where they will soon have to take it off the market. This will actually help the market correct itself and eventually send us back to a sellers market. It seems that I meet a couple of agents each day that have at least one listing like this. With so many out there, I sense that buyers who are making low ball offers are starting to get the message. Some sellers do have room to negotiate, but many don't.

To Paint or not to Paint

Seller's always say that they don't think they should paint b/c the new buyers will want to choose their own colors. Not necessarily true. Painting interior walls is a good thing before listing a home. The home will show much better. Just make sure that you choose neutral earth tone colors. Light tans are very popular now. Everything white is not good. You need some color. Most buyers will be happy that they can move in and not have to worry about painting. If a buyer doesn't like that, he can paint over them. Those buyers weren't going to like your walls before you painted them either. In the meantime, your home will show much better. Especially if you have moved out. The buyers can see all the dings and scratches and places where you had pictures hung. If it's freshly painted, it makes it look like you really took care of the place. They of course extend that thought to other parts of the home. A fresh coat of earth tone tan paint can go a long way and it doesn't cost that much.

Buyer's Agent

Here's another commission myth. Many people think that they will save 3% when purchasing if they don't use an agent. Sure, the seller will be glad to reduce the price by 3% if he doesn't have to pay a buyer's agent. He will be thrilled that you have no one protecting you. He might have to reduce his price by much more than 3% if you had a buyer's agent with good negotiating skills. There's also money that the buyer's agent can save a buyer concerning the writing of the terms of the contract such as home warranty, home inspection, termite inspection, earnest money, conveyance of appliances, closing costs, prepaid items, etc. The seller will be more than glad to knock off 3% of the price if he knows he doesn't have to deal with a knowledgable and skilled buyer's agent. For goodness sake, if you're a buyer, make sure you have a buyer's agent!! Their services are free and they will save you a lot more than 3%.

Inventory Numbers Starting to Settle

Being an old math instructor at the College of Charleston, I always pay close attention to the statistics of the real estate market. One reason that this real estate market seems slow is that the inventory, or amount of homes for sale, has drastically risen over the last 3 years. We now have 3 times the inventory that we had 3 years ago. That's what created the buyer's market. I have been watching this number very closely and am glad to report that the inventory seems to be settling out. We have not seen a significant rise in inventory this year. The hope would be that we can now start to see a decline in inventory numbers. Many factors should contribute to this including less building permits, more homes taken off the market and rented out, and most importantly, buyers recognizing what a great time it is to buy. For things to get back to normal, inventory must go down to more normal levels.

Truth about what Realtors Get Paid

It's amazing to me that people think that on a $200,000 home sale, I get paid 12,000(6%). I wish!! The 6% is split between the listing real estate company and the buyer's real estate company. Of the 3% that my company receives, my portion of that varies from around 50% to 80% depending on how much business I've conducted during the year. Keep in mind that I pay for all the advertising as well as franchise fees and insurance. So, on a typical transaction, after advertising costs are paid, I receive about 1% of the sales price, or $2000 on the sale of a $200,000 home. Of course, in addition to regular federal income tax, we pay a 15.3% self-employment tax as well. And since we are independent contractors, we pay for our own health insurance. And I thought my job as an educator was poorly paid.

Fed cuts Interest Rate

Most of you should know by now, but if you don't, the Federal Reserve cut it's key rate by a half point yesterday. This will begin to affect mortgage rates within a couple of days. Recently, a 30 year fixed loan was going for between 6-6.25%. We should see it come down to between 5-5.75%. The Fed did this in response to the softening real estate market, the credit crunch brought on by too many iffy loans, and the impact that all this has on the whole economy. If you hadn't noticed, the housing market was the only thing propping up our economy the last few years. As people buy homes, they also buy furniture, renovate, and landscape. If you've been thinking about buying a home, now seems to be a great time. Inventory is still very high, giving you plenty to choose from and negotiable sellers and now you can get your loan for well less than 6%. On a $200k loan, this will save you about $65 on your monthly payment. Buyers should jump in with both feet. I'll be looking for an investment for myself as well.

Lower Interest Rates

While the Fed may or may not be lowering rates, there is a way that you can get a lower interest rate on your home mortgage. Most of the time, you can get the seller to help out with this. Here's the idea. It's called a buydown, as in buy down the interest rate to a lower value. Someone pays the bank a certain amount at closing and you get a lower interest rate. The lower rate could be for any number of years. Typically its for 7 years or less since most people will be moving after 7 years anyway. In most cases, the seller of a home is willing to negotiate price as well as other fees. Many times, the seller will pay for the buyer's closing costs if the offer is acceptable. Instead of having them pay the closing costs, have the seller buy down your interest rate. Let's look at a $250k home at 6.25% interest on a 30-yr fixed rate mortgage. The monthly payment would be a total of $1539 not counting taxes and insurance. At 5.25%, the monthly payment would be only $1381. That's a difference of $158/month or $1900/year. The seller could agree to pay your mortgage company $5700 at closing so that you could have the lower rate for the first 3 years. After that, your rate would go up to the 6.25% that you qualified for when you bought the home. Many buyers like this idea b/c it gets them started at a lower rate. Usually, the first 2 or 3 years are the toughest as far as making payments go.

Closing Costs

Typically, a buyer can expect to pay about 3% of the purchase price in what the attorney call closing costs and prepaid items. After I explain what these are, I will tell you a way get the seller to pay them at closing. Closing costs are a combination of many different items. Most of them fall into 2 categories; lender fees and attorney fees. The biggest lender fee is usually the cost of obtaining the loan, also known as the discount fee. It's usually around 1% of the purchase price. The remainder of the 3% is other miscellaneous lender and attorney fees and pre-paid items. The prepaid items are pre-paid insurance and taxes. The lender requires you to prepay a certain number of months of insurance and taxes. This protects them in case you quit making your payments. Typically, you prepay 15 months of insurance and 12 months of taxes. The lender holds this money in an escrow account and pays the insurance and tax bill for you when they come due. They are of course also collecting a small amount in each monthly payment that will also go toward these 2 items. Now the good part: you can usually get the seller to pay all of your closing costs and prepaid items. You might ask why he should agree to this. Let's suppose that you have agreed to buy his home for $200k. The closing costs and prepaid items should be around $6000. You change the contract so that the purchase price is for $206k, with the stipulation that the seller pay $6000 towards your closing costs and prepaid items. Essentially, you are financing your closing costs since you will now have a loan for $206k instead of $200k. Your monthly payment will be only insignificantly higher. And the seller will still end up with $200k. This is how many people are now buying homes without any money out of pocket. You get a 100% loan and have the seller pay the closing costs and prepaid items. If you have the 3%, I have another good idea in my next post as to how to use the 3% that you can get from the seller.

Buyer's Preferences

Home buyers in increasing numbers want garages with two or more spaces in their homes, according to the 2007 Profile of Buyers’ Home Feature Preferences. Since the last survey in 2004, oversize garages saw the biggest growth in terms of what recent buyers considered very important in a home, gaining 16 percentage points to 57 percent. Among buyers who purchased homes without this feature, 56 percent of them said they would have paid more for an oversize garage, compared to only 6 percent in the 2004 survey.
Other priorities for today’s home buyers include air conditioning, with three out of every four respondents ranking this as "very important," and a walk-in closet in the master bedroom, which was very important to 53 percent of respondents. Hardwood floors and granite countertops each gained 7 percentage points from the 2004 survey, with 28 percent and 23 percent, respectively, of buyers viewing these features as "very important." Gaining 6 percentage points was cable/satellite TV-ready, at 46 percent.

Reality for Sellers

Here are some excerpts from a recent article by Steve Harney. The basic gist is that sellers in this market should be looking for an agent willing to tell the truth about the price.

The days of quick home sales, selling for top dollar and pricing wars on homes are gone. As such, today’s successful real estate agents know that merely getting the listing isn’t enough; you now have to educate your clients on how to price their home correctly so it can still sell quickly in today’s real estate market.
The challenge for Realtors is the homeowners’ perception of what their home should sell for. As recent as June 2007, a survey by the Boston Consulting Group found that fifty-five percent of American homeowners believe their home is worth more today than it was one year ago. In reality, in many locations, home values have gone down.
Unfortunately, some real estate agents, who see their income decline as the number of home sales go down, are now operating in a state of fear. As a result, when they meet with prospective clients, they may be concerned they won’t get the listing (and thus not get a commission), so they tell clients what they want to hear - namely that their home will sell for top dollar in record time. Then when the house doesn’t sell and the client agrees to lower the price, the client/professional relationship becomes strained. Clients can’t help but feel their agent gave them inaccurate information.
To truly shine as a real estate agent today, you simply need to educate yourself on the realities of the market and then tell each client the truth. Help clients understand where the pricing used to be, where it is today, where it will likely be three months from now, and most importantly, why it is that way. Only then will clients be able to make a realistic pricing decision that will enable you to help get their home sold.
Following are the five pricing considerations you need to educate yourself and your clients on. By taking these points into consideration when pricing listings, you’ll be able to put that “sold” sign on listings faster.
1. Increased Inventory
2. Increased Mortgage Rates
3. Increased Mortgage Restrictions
4. Increased Vacancy Rates
5. Increased Foreclosures
So when you conduct your next listing presentation, be sure to prepare by educating yourself on these five factors, and then explain how these factors impact your clients’ selling decision. Let clients know their options, the realities of the market and what their home will likely sell for given these five considerations. By doing so, you’ll help your clients price their home correctly so it doesn’t sit on the market for years. Even more important, you’ll become known as a trustworthy and reliable Realtor who delivers results, even in a tough market.

Buyer's Market

A wise real estate investor recently told me that it was his dream as a young man to buy one house every year and rent it out. He managed to do that and is now very wealthy. I have been carefully watching some very successful real estate agents in this current market. Two years ago, I watched them sell their own rental properties for huge gains in a hot seller’s market. And they are using those gains, today, to snap up the best deals in this buyer’s market. Renters will help them pay the mortgages and pay down the principal while the property appreciates over the next few years. They will cash out during some future seller’s market. They have the insider’s knowledge of what point in the cycle we are located. They are securing their financial future a lot more this way than they are on real estate commissions. Having watched this process, I made an acquisition back in March. I now have enough experience to help you do the same thing. I can’t believe that there will be a better time to buy than now. There are a ton of great opportunities out there. True, there are also many overpriced homes. However, it is quite easy for me to separate the opportunities from the chaff. Let me help you and your family invest in your future. It is something that I enjoy doing and something I excel at. If you have the ability to buy something now, let me know and we will begin searching for the best opportunity that fits your family’s needs. If you don’t think this will work for you right now, start saving up and be ready for that next buyer’s market.

How Much is Your Home Worth?

Here's a great way to educate yourselves on how much your home is worth. We can set up a search for you in the MLS that will notify you on a weekly or monthly basis about any real estate activity in your neighborhood. Right now there's a lot of activity in all the neighborhoods!! You will see new listings, when current listings go under contract, when listings sell and what they sold for, price changes on active listings, as well as withdrawn and expired listings. Over time, you will get a very good feel for how much the homes in your neighborhood are worth. You will be the most educated home seller in your neighborhood. Let me know if you would like me to set this up for you.

Over priced listings

Most everyone probably knows that this is an extreme buyer's market. If you don't have to sell your home now, you shouldn't. The same number of buyer's are still out there, but the inventory of listings has over doubled. We continue to sell between 1000 and 1500 homes per month in the Charleston area. However, inventory has increased from 4000 in 2004 to over 10,000 homes on the market right now! That puts the buyers in control. If we had more buyers than normal, it would be different. But, we don't. The number of buyers has been pretty steady. To sell a home right now, it must be just about perfect inside and out and must be one of the lowest priced homes in your neighborhood. Buyer's just have too much to choose from and they have access to all the listings because of the internet. They will not buy an overpriced listing. In the past week, I have seen a seasoned agent list a home for $320k when it will not sell for a penny over $280k and another list a lot for $217k when the exact same one next to it is not selling for $159k. That's ridiculous. Did they tell them that there will be a history on the MLS for all agents to see? Here's a test for an agent during a listing interview. Have another agent do a CMA(comparable market analysis) on your home to figure out what the correct selling price should be. Then, while interviewing agents, tell them that you would like to sell it for $30k more than that figure. If they say that they think they can do it, send them on their way. You need someone that will tell you the cold hard truth about your home.

Realtor image

For my first entry, I just want to talk about some of the perceptions people have about Realtors. I have only been in the business a couple of years, but I am shocked at how many people have very bad preconceived notions about Realtors. It's just my opinion, but to me, the most important thing you could do for a career is be a doctor. My daughter has that covered. She is the chief resident at Augusta Medical College. The next most important career would seem to be an educator. What could be more important than teaching our children? Well, I teach math at the College of Charleston as well as being a realtor. After those 2 careers, the next most important would seem to be someone to help me with my finances or to help me buy and sell my home, the biggest purchase most of us make in our lives. As with any profession, there are lots of bad practitioners out there. Given that there are so many, there are certainly going to be some bad ones out there. But don't let that spoil it for the ones of us that just want to help people make the biggest purchase and investment of their lives. There are lots of pitfalls in the home buying process and we can help you avoid them. Sure, we want to be compensated for our knowledge, skill, and expertise, but who doesn't. There are a lot more of us good Realtors out there that get a lot of satisfaction in doing a good job at what we do. Our best chance of staying in the business and getting referrals is to do a good job for our clients. And as for you doing it without our help, be careful. That sounds like me going over to the hospital and doing a surgery. Probably not a good idea.