How HOA Payments Reduce Your Buying Power

buying powerIf you buy a condo or town home, there is almost always a homeowner’s association (HOA) that charges a monthly fee. What the fee buys you varies, but typical benefits are exterior maintenance, water, trash, and sometimes amenities such as a pool, tennis courts and club house.

The issue with HOA payments is they reduce your buying power, which is the amount of house you acquire for your monthly payment.

How You Lose Buying Power
Most people have a total monthly payment (TMP) they can afford, say $1200. If your HOA fee is $335, it takes $335 from the TMP. This leaves $865 for the rest of the TMP. If your HOA fee is $167, it leaves $1,033 for your TMP. Obviously you can borrow more with $1,033 a month than with $865, so that’s how the HOA fee impacts how much house you can buy.

Impact On Buying Power
What can you buy for $865 per month with a $335 HOA fee?

  • A $155,000 condo with 3.5% down and 4.5% interest creates a monthly payment of $840.18 (Principle + Interest + Mortgage Insurance)
  • You also need $77.83 for taxes and about $20 for insurance
  • $335 HOA fee
  • TMP = $1264

What can you buy for $1,033 per month with at $167 HOA fee?

  • A $175,000 house with 3.5% down and 4.5% interest creates a monthly payment of $948.55 (PI + MI)
  • You need $88.92 for taxes and about $20 for insurance
  • $167 HOA fee
  • TMT = $1,165.87

As a seller with a high HOA fee, you are competing against properties that are 11% higher priced, most likely with more features, more square footage, perhaps newer, or in better locations. As a buyer, you are bypassing properties that are 11% higher in price.

Another consideration is property appreciation. Since HOAs tend to increase over time, they put a drag on appreciation as they rise.

That being said, when a property is RIGHT for you, then that is your major consideration, not the HOA fee; it becomes something you live with to have the house you want.

Appraisals

Real-Estate-AppraisalWhen you buy a house, your lender will require an appraisal on the property before they will complete your loan. Why is an appraisal necessary? Because the bank wants to know that they are not loaning more than the property is worth.

What’s an Appraisal?
Appraisals are completed a week to ten days before the closing. Even though lenders require appraisals, you get to pay for them. The cost is $400 to $500.

Appraisals are conducted by – believe it not – appraisers! These are professionals who specialize in determining the “actual value” of properties. The actual value is based on past sales, features, condition, location, and other factors. Appraisers attempt to remove biases and simply look at facts and numbers.

Appraisers vs Real Estate Agents
Instead of “actual value,” real estate agents determine the “market value” of properties. Market value is the price that buyers will pay for a house in the current market. Market value is based on supply and demand, marketing plans, buyer emotion, and market trends. If a market is active and buyers are frenzied, they will often pay higher prices than past sales appear to support.

What to Look For in an Appraisal
From a buyer perspective, your objective is for the appraised price to be at least as high as the purchase price; anything higher is a bonus. You don’t want it to come back lower than the purchase price. The reason is that lenders loan you money based off the appraised value.

For example, if you are buying a $200,000 house with an FHA loan (borrow 96.5%), and the appraisal comes back at $195,000, then the bank will only loan you $188,175 not $193,000.

If the appraisal comes back too low, you have a couple of options. First, make up the difference out of your own pocket. In the previous example, that means you come up with $11,825 down payment (5.9%) rather than $7,000 (3.5%). Another option is to have the seller lower the purchase price to match the appraised value. Your third option is to terminate the contract and walk away.

Summary
Think of your appraisal as a reality-check on the price you agreed to pay the seller. It’s nice when a third party agrees that your new home is a good value – or warns you that the house is over-priced.

Homeowner’s Insurance: How Much Coverage Do You Need?

insurance-agentWhen you buy a new home, you are required by the lender to have homeowner’s insurance (aka “hazard insurance”). The question is, how much coverage do you need?

Daryl Alexander, an agent in Fort Collins with State Farm, recommends that you “make sure your home is insured for at least 100% of its estimated REPLACEMENT cost. “

What does Daryl mean by “replacement” cost?

The Difference Between MARKET VALUE and REPLACEMENT COST
Market value is the amount a buyer would pay for a home. Replacement cost is the rebuilding cost necessary to repair or replace the entire home.

Over the years, the cost of materials and labor increase, sometimes faster than the market value of a property. If you have a fire, water leak or hail claim, and you’ve owned your house for many years, the cost to repair your house could be really high.

Cost of Premium
It sounds like replacement cost is the way to go, right? Then why would anyone get market value insurance?

The premium for market value insurance is lower than replacement insurance, which is why many homeowners buy it.

That’s being penny-wise and pound-foolish, as the expression goes. For the minimal increase in cost, replacement insurance gives you the coverage you’ll need in case of a disaster. Remember, you are buying peace-of-mind that your family and possessions are protected.

Review Your Policy Occasionally
As the years go by, it’s a good idea to get together with your insurance agent to ensure you still have the right coverage for your home. This is particularly true if you have remodeled bathrooms and kitchens, finished basements, or added on rooms or living spaces.

The worst time to find out you DON’T have enough insurance is when a disaster occurs. Avoid the heartache and trauma of insufficient coverage; find a trustworthy, reputable insurance agent, listen to his/her advice, and buy the coverage he/she recommends.

If you would like a referral to some trustworthy insurance agents, please contact Gary Clark.

How Does The Home Inspection Process Work?

home-inspection-2After you negotiate the price and terms of your contract to buy real estate, you have the right to inspect the property.

You hire an inspector to “check under the hood” of the property. This will cost between $200 and $500. The inspector produces a report with everything he/she finds. Inspectors go through the house with a fine-toothed comb, so they find lots of stuff, big and small. You and your agent look through the report and determine what you can’t live with, such as unsafe radon levels in the basement, for instance. If there’s more than you can handle, you have the option of terminating the contract.

If you want to move forward, you submit an Inspection Objection document to the seller with all the issues you want fixed before you purchase the house. How much should you ask for? While everyone has their own negotiating style, I prefer to ask for a reasonable number of items, rather than everything in the report. No house is perfect, even brand new ones, so it’s not logical for the seller to fix everything. Instead, look for safety issues, items that should be expected to work, and things not working due to neglected maintenance.

Inspection Objection items are negotiable, so you and the seller will debate what will be fixed: all, some, or none. To me, this is the advantage of asking for a reasonable number of items; you are more likely to get what you want if you are reasonable.

After you and the seller agree on what will be fixed, one of the agents prepares an Inspection Resolution, which you and the seller sign. This binds the seller to address the items on the Resolution.

The last step is to verify the work was done. You can hire the inspector to re-inspect the property. You can ask for reciepts to show the work was done. You can also walk-through the property yourself.

Inspections are a necesarry part of home buying (and home selling) process to ensure that peace of mind when you take over your new home.

For a list of qualified inspectors, please contact Gary Clark. 

Making an Offer on a Property

First-Time-Home-Buyers-ExcitedWhen you find a property that you want to buy, you make an offer on it. Real estate offers are in writing, and inform the seller of how much you are willing to pay. Your offer consists of a Contract to Buy Real Estate, disclosures and addendums, proof of financing, and an earnest money check.

Contract to Buy Real Estate
This is a standard Colorado contract, prepared by your real estate agent, which defines the price, terms and timeline of your offer.

Disclosures and Addendums
There are numerous supporting documents to the Contract. These are the most common ones, although there can be more.

  • Source of Water Addendum – Informs the buyer where the property’s water supply comes from. This is important for rural properties and new subdivisions, where the water source could be less reliable than established municipalities.
  • Seller’s Property Disclosure – Informs the buyer about what the seller knows about the property.
  • Square Footage Disclosure – Informs the buyer where seller came up with the square footage of the property.
  • Closing Instructions – Defines who is the closing company (Title Company).
  • Lead Based Paint Disclosure – Only required for houses built prior to 1978. Informs the buyer of the seller’s knowledge of the presence of lead-based paint on the property.

Proof of Financing or Funds
The purpose is to inform the seller that you are a “serious” buyer with a down payment and loan (or the cash) to purchase their property. Normally you will submit a Pre-qualification Letter from a bank or mortgage company. Even better is a Pre-approval Letter, which means you have been through a more advanced process called underwriting.

Earnest Money Check
The final part of your offer is an Earnest Money Check. Earnest money is a “deposit” on the property, held in an Escrow Account. So be aware…your Earnest Money Check will be cashed; have enough in your account so the check will clear!

Money in an Escrow Account is neither the buyer’s nor the seller’s; it’s held for the benefit of both parties. At the Closing, the Earnest Money is transferred to the seller and is applied to the down payment. If the transaction is terminated prior to the Closing, the money reverts back to the buyer (assuming all contract terms were met).

After You Submit Your Offer…Let The Negotiations Begin
Wait to hear from the seller. They are required to respons prior to the Acceptance Date. The seller has three options:

  1. Accept your offer as-is
  2. Counter your offer
  3. Reject your offer

I hope your buying strategy is sound and you are successful with your offer. Hearing “YES” on a contract is one of the most exciting days of your life.

Zestimate® or Guesstimate?

Home-Equity-Loan-3Ah, the Zestimate…loved by home buyers because it gives them a dollar value on a property…hated by real estate agents because it’s so inaccurate.

When used properly, a Zestimate is a useful tool; when misused for things such as contract negotiations and pricing real estate, it causes problems. Let’s look at what a Zestimate is, and how it should be used.

What is a Zestimate?
This definition of Zestimate is from Zillow’s website:

“The Zestimate® (pronounced ZEST-ti-met, rhymes with estimate) home valuation is Zillow’s estimated market value, computed using a proprietary formula. It is not an appraisal. It is a starting point in determining a home’s value. The Zestimate is calculated from public and user submitted data; your real estate agent or appraiser physically inspects the home and takes special features, location, and market conditions into account. We encourage buyers, sellers, and homeowners to supplement Zillow’s information by doing other research such as:

  • Getting a comparative market analysis (CMA) from a real estate agent
  • Getting an appraisal from a professional appraiser
  • Visiting the house (whenever possible)”

Let’s break Zillow’s definition down and see what it tells us:

  1. It is not an appraisal; it is a starting point. This statement is telling you that Zestimates are not meant to be accurate measures of value. Rather, Zestimates are meant to give you a ball-park idea of the value.
  2. (It) is calculated from public data. This informs you that Zestimates pull data from county assessor’s records. These records are used to calculate your property taxes, and are notoriously inaccurate measures of market value. Most tax payers want the assessed value as low as possible so they pay lower taxes.
  3. Get a CMA from a real estate agent. Zillow says “your real estate agent physically inspects the home and takes special features, location, and market conditions into account.” Not to mention recent sales and homes currently on the market, and the home’s condition. Zillow can’t know a house has a remodeled kitchen or smells like cat pee.

How to Use Zestimates
Use Zestimates a starting point to determine the general price point of a neighborhood. In other words, houses in the neighborhood are mostly $250,000 or $350,000. You can also use Zestimates to compare one house to another, which will tell you if a house is generally higher priced than others around it.

How NOT to Use Zestimates
The biggest misuses of Zestimates are negotiating the purchase price of a house you want to buy, and setting the price of a house you want to sell. For these tasks, you must get a market analysis from a real estate agent. You need an up-to-date, accurate number based on research conducted by a qualified professional who is knowledgeable about that local area, not a computer program using inaccurate data.

If you would like a market analysis of your home’s value, please contact Gary Clark with Century 21 Humpal.

I’m a Buyer, Why do I Need a Real Estate Agent?

Agent-GuideI can hear the disappointment in their voice through the phone; it’s a caller who wants information about a house they saw on Zillow or Trulia. They want to know how many bedrooms it has, how big it is, if the basement’s unfinished, stuff like that. Due to our red-hot market, I have to tell them the house is under contract. Sorry.

When I ask the callers if they are working with an agent, most say no. This always surprises me. I would think people would welcome free professional help in finding a great property at a fair price, and to ensure that their transaction goes smoothly. After all, buying a house is a BIG PURCHASE, usually for hundreds of thousands dollars.

Yet for some reason, many people would rather shop on their own than work with real estate agents. Is it fear of salespeople? Fear of being coerced into something they don’t want? Or just needing some time to get comfortable? A good real estate agent is there to guide you, advise you, and be your advocate – not to cheat you. Here are the biggest benefits of having a guide on your home buying journey.

Buyers Agents are FREE
The first reason to engage a buyer’s agent is that the service is FREE. How can it be free? Because the seller pays a commission to the listing agent (the agent who listed the house). The listing agent shares their commission with the buyer’s agent.

More Effective House Hunting
Buyer’s agents use the best tools to hunt for houses: Multi-listing Services (MLS). This is most complete, up-to-date source of information. It’s updated instantly, whenever houses are added or data is changed.

Buyers without agents use popular websites and phone aps such as Zillow, Trulia, and Realtor.com. Data in these programs is old, maybe from days or weeks ago. That’s why the people who call me think houses are still available when they are under contract, and they don’t know about new listings.

So when you work with a buyer agent, you get someone looking full time for you, using the best tools available. You are more likely to find a great house with an agent than looking on your own.

Advocacy: Your Best Interests
When you call a listing agent, you need to understand that he or she works for the seller – not you. Think about it this way: assume you are in court. Would you go to the prosecutor and ask him or her to defend you? Does the prosecutor have your best interest in mind, or his client’s?

The listing agent is legally bound to look out for the best interests of the seller – not you. Anything you tell a listing agent he is obligated to tell the seller, no matter how personal or confidential.

You need an advocate during the entire buying process. You need honest advice on the price you offer, the condition of the house, the contract you write, and the stack of disclosures, notices, and addendums you will sign. During negotiations, a buyer agent looks out after your interests only – a seller agent looks out for the seller’s.

After your contract is accepted, a buyer agent still works hard for you. The contract has a list of tasks and a schedule by which you need to complete them. A buyer agent monitors these important tasks, tells you what to do, and keeps you on track with the dates.

Keep in mind that your earnest money is “at risk” throughout the contract. (Earnest money is like a deposit.) If you don’t perform on the contract according to the schedule, you can lose your earnest money to the seller. A buyer agent watches the schedule to keep your earnest money safe.