Author: Shannon

Seven point nine five.

That’s how many years the average American homeowner lives in their home, according to the number crunchers at Attom Data.

Whether you are at the beginning, middle or end of this nearly eight-year period, some day you will sell your home. While it’s great to renovate for your comfort and enjoyment, keep in mind that what you do to the home now may have an impact on both how long the home takes to sell and how much money you’ll walk away with.

In other words, investing $25,000 in remodeling will not necessarily mean you can tack on an extra $25,000 to the asking price when you sell the home.

Let’s take a look at some of the worst renovations you can make if you hope to get a payoff when you sell.

Installing wall-to-wall carpeting or hardwood flooring

Yes, there was a time when new wall-to-wall carpeting or hardwood flooring would boost a home’s value. Those days are long gone.

The fact that flooring-giant Armstrong sold off its hardwood line is a tip that Americans are officially out-of-love with hardwood floors. And carpet?

Lowe’s had such a hard time selling carpet that they decided to offer free installation. To no avail; they still saw a nearly 8% decrease in carpet sales.

Today, homebuyers prefer luxury vinyl and will discount a home’s perceived value if they will need to replace flooring after they move in.

Converting the garage

Garage conversions are far more popular in some areas than they are in others. They are especially popular in older neighborhoods with small homes.

Hey, who can blame someone for converting a garage into a bedroom when they need the space?

Just don’t expect that the conversion will translate into more money when the home is sold.

In fact, “If it’s not permitted, they’ll have a problem selling,” cautions George Holmes of Eagle Appraisal of Las Vegas.  And, it if is permitted?

“It depends on the price class of the home,” Holmes said. “If it’s a cookie cutter home and it lacks a 2-car garage, we’ll deduct $8,000 to $10,000 from the value. It’s not cut and dry, however,” he cautions.

You can almost count on your home appraising for less than similar homes that have garages.

Permanent Conversion of a Bedroom

Bedrooms add value to a home. Often, however, homeowners permanently convert a third bedroom into an office, a gym or a family room.

While there is nothing inherently wrong with adding any of these conversions, if you can’t change the room back to a bedroom when you sell the home, the value of the home diminishes.

Since you now have only two bedrooms, the appraiser will compare your home to other two-bedroom homes.

Better Ways to Spend the Money

No matter how much you renovate or remodel a home, if deferred maintenance rears its ugly head, you will lose money on the sale of it.

Put your home renovation dollars toward the less sexy projects: new heating, plumbing and electrical upgrades and anything that boosts the home’s curb appeal.

Every industry has its “inside” jargon and the real estate industry is no exception. Some of the lingo, such as “location, location, location” are a snap to decipher, while other terms are downright incomprehensible.

Real estate agents sometimes have a tendency to roll this stuff off their tongues assuming their clients understand when, in reality, they may as well be speaking a different language.

Here is a glossary of some of the most common terms you will hear during your real estate transaction:

Adjustable-rate mortgage (ARM) – A mortgage with a fluctuating interest rate. ARMs tend to have lower initial interest rates for a set period of time, and then begin adjusting according to an index. They may adjust monthly, quarterly, annually or longer.

Addendum – A form describing a change or addition to the purchase agreement. Anything added in addendum should be looked at very carefully. Addendums are used for many changes, such as the extension of the closing date.

Appraisal – In a real estate transaction, the appraisal is a determination of the value of a house. The evaluation is required by the lender and prepared by the lender’s choice of an objective and impartial professional appraiser.

Certificate of title: The title certificate is a document that ensures the property being sold is legally owned by the seller(s) and that no other party owns any part of it or has any claims, such as liens, against it.

Closing – This is where the term “closing table” comes into play, and the process is also known as “settlement.” In the past, all parties would sit around a table to sign the closing documents. Today, there are a number of variants, including virtual closings.

Closing costs – All the additional expenses incurred in financing and purchasing the home. These expenses typically include attorney’s fees, a loan origination fee, escrow impounds, and other miscellaneous charges. There is no set cost but the ballpark range is between 2% to 7% of the sales price of the house.

CMA (Comparative Market Analysis) – A determination of a home’s market value for the purposes of determining a fair asking price. Real estate agents compile the CMA by comparing the subject house to those that have recently sold within close proximity. Although the CMA is similar to an appraisal, it will not replace a lender-required appraisal.

Comps – Properties that are comparable to the property being analyzed.

Contingency – A section of the purchase agreement that specifies certain conditions that must be met in order for the sale to proceed. Common contingencies in purchase agreements include those for inspections and loan approval.

Counter offer – A form that requests the addition or elimination of parts of the original purchase agreement.

CC&Rs – Covenants, conditions and restrictions. This is where you find out that, no, you can’t paint your front door blue. These documents set out the rules that homeowners must obey in a managed community.

Disclosures – Information about the home that a seller must provide, by law, to a buyer. The number and types of disclosures provided to the buyer depend on region. In California, for instance, the lengthy Transfer Disclosure Statement provides the buyer with information from the seller regarding the condition of the property and any repairs or modifications performed.

Deed – The deed is the legal document that provides proof of the transfer of ownership of real property.

Down payment – The down payment is the percentage of the purchase price that the buyer pays in cash. Depending upon lender and loan program, this percentage generally ranges from 3 to 20 percent. The down payment is a lender requirement.

Due Diligence – The responsibility of the buyer to exercise the appropriate care before closing on the purchase. Due diligence includes verifying all of the seller’s representations and uncovering any other pertinent facts that have not been disclosed but have a bearing on whether or not you want to purchase the property.

Earnest Money Deposit – The earnest money deposit is money provided by the homebuyer to the seller to prove her earnest intent to purchase the property. The amount varies, and the check is typically submitted with the purchase agreement. If the sale goes through, the earnest money deposit is applied to the down payment. If the buyer walks away from the sale, through no fault of the seller, he may forfeit his earnest money deposit.

Escrow – The escrow process assures that the purchase funds are released and that the transfer of the house is completed. The escrow company is a neutral third party to the process and uses the purchase agreement and other associated documents as instructions.

Escrow Impounds – The lender requires a deposit, as prepayment of taxes and insurance, at the close of escrow. This deposit goes into an escrow account and protects the lender in the event that you allow your insurance to lapse or don’t pay your property taxes. By law, the lender can only request an amount that is equal to no more than two months’ payments.

FHA Loan – This is a loan tendered by a traditional lender but insured by the Department of Housing and Urban Development and administered by the Federal Housing Administration. FHA offers several home loan programs, some offering low down payments, others to assist buyers of fixer-upper properties. FHA does not provide loans — it provides insurance for loans.

FICO Score: Your FICO score is a compilation of information from the three major credit reporting agencies and calculated by the Fair Isaac Corporation. Your FICO score reflects your debt payment history, amounts owed, length of credit history, new credit and the types of credit you use. The FICO score range is between 300 and 850. The higher your FICO score, the less of a credit risk you present to lenders.

Fiduciary duty – The broker under which your real estate agent works is your fiduciary. She is held to specific duties, outlined by state law, to her principal (you). Some of these duties include disclosure, confidentiality, reasonable care and diligence and loyalty.

Final Walk-Through – The buyer is allowed one last chance to walk through the home prior to the close of escrow. This inspection is not to turn up newly-discovered defects, but to ensure that the home is in the same condition as when the offer was tendered.

Fixed-rate mortgage – A type of mortgage in which the interest rate does not fluctuate over the life of the loan.

HOA Docs: Homeowner’s Association Documents. When purchasing a condo or a home in a managed community, you have a right to view recent HOA meeting minutes, a copy of their current budget, CC&Rs and other equally fascinating documents. Think boring, and you’ve got an idea of what’s included in the HOA docs. They’re important, though, so set aside an hour or two to go over them.

Loan-to-value (LTV) ratio – The LTV is a ratio that lenders use to assess risk when providing a mortgage loan. The LTV represents the amount of the mortgage divided by the appraised value of the property. Lenders consider higher LTV ratios as high-risk loans.

Mortgage – A legal document that pledges the house to the lender as security for the loan to purchase the house.

Mortgage insurance – An insurance policy that compensates the lender in the event a borrower defaults on the loan.

PITI (Principal, Interest, Taxes and Insurance) – Your monthly mortgage payment. Principal is the part of the payment that pays down the loan, the interest is the part of the payment that pays the lender for loaning you the money to buy the home, taxes and insurance are the necessary evils that must be paid for, typically into an escrow account each month.

PMI (Private Mortgage Insurance) – Like mortgage insurance, this policy protects the lender against a buyer’s loan default. Lenders on high-risk loans – typically when the LTV exceeds 80 percent — require PMI. When the homeowner’s LTV falls below the specified rate, PMI may often be discontinued.

Point – A one-time charge by the lender for originating a loan. A point is one percent of the amount of the loan.

Pre-qualification – The process of determining if a borrower qualifies for a loan and the approximate amount of money she may qualify to receive.

Title Insurance – An insurance policy that protects against damages due to defects in the chain of title.

VA Loans – These loans are offered by the Department of Veterans Affairs exclusively to members of the military. Veterans, those on active-duty and reservists are all considered as eligible to apply for VA loans, which typically require no down payment.

If you feel like you’re reading a foreign language when you look over your homeowner’s insurance policy, you aren’t alone.

Where simple language that’s easy for the layperson to understand will suffice, the typical homeowner’s insurance policy is loaded with industry jargon. Grab a cup of coffee to keep yourself awake while we pick that policy apart and see if we can come to grips with some of the terms.

Deciphering Insurance-ese

Pay very close attention to the Conditions clause of the policy. This sets forth your obligations and duties. It may be the most important clause in the entire contract, for if these conditions are not met, your claim may be denied.

One of the common terms found in most homeowner insurance policies is “Actual Cash Value.” This number reflects the amount the company will pay in the event of a disaster.

It is typically equal to what it would cost to replace the house, minus depreciation. Many homeowners confuse Actual Cash Value with Replacement Value, which is the amount the company will pay without the depreciation deduction, yet still subject to policy limits.

You will find a description of how the company arrived at this figure under the “Claim Settlement Provision” portion of the policy. The “Functional Replacement Cost” section of the policy describes the determination of Replacement Value.

We’ll Pay, But So Will You

Coinsurance is a term that confuses not only those in the market for a homeowner’s policy but health insurance as well.

You may find this concept listed as “Insurance to Value” in a homeowner’s policy. The first thing to understand about coinsurance is that it only comes into play in the event of a partial loss.

Described as a percentage, this provision defines the amount of the total damage that the company will cover. For instance, many insurers recommend that, if you don’t want to insure at full value, you should obtain a policy with at least 80 percent coverage.

In this case, the insurance company will pay up to 80 percent of the loss while you are responsible for the remaining 20 percent.

Now, to add even more confusion to the mix, this clause only comes into play when the loss and the policy limit fall below the coinsurance percentage.

Your policy’s deductible is the amount you pay in the event of a disaster. This amount may be listed as a specific dollar amount or a percentage of the home’s insured value. The choice of the deductible amount determines the premium (amount you pay for insurance), with the premium going down as the deductible goes up.

What happens if the home is so damaged that you can’t live in it until it is replaced or repaired? The “Loss of Use” portion of the policy spells this out, explaining how much you will be reimbursed for expenses incurred to find additional shelter during this time.

Endorsements are Only Good in Politics

Attached to your policy are the Endorsements. These forms modify the terms of the policy in some manner.

This is the toughest part of the insurance policy to understand for most homeowners. Some of these endorsements may negate policy clauses, or place conditions on them.

It’s a bit like reading the Internal Revenue tax instructions. If you have any questions on this part of your homeowner’s policy, consult with your insurance rep or attorney.

The Perils in Your Insurance Policy

In going over your insurance policy you may notice references to “perils.” These perils are then classified as either “open” or “named.” and this is where jargon takes a turn toward the ridiculous.

The peril is the event that caused the loss, such as theft or fire. If your policy provides for open perils, it will name which ones are excluded from coverage.

If you own a named perils policy, on the other hand, the policy will list every one of the perils that’s covered.  If you have concern about replacement of your personal possessions in the home, pay close attention to this part of the policy.

You may have an open perils clause for the home and a named perils clause for its contents. This is why updating your coverage as you acquire new possessions is so important.

If you live in earthquake country or in a flood zone you will need to purchase an additional policy. You may not be able to purchase this policy on the open market if you live in a high-risk area, but there are government-mandated insurance plans available. Check with your state’s insurance commissioner for details on these plans.

If you live in an area at high risk for hurricane activity your insurance choices become even more confusing. While most policies cover damage or loss from the hurricane, they won’t cover any damage from the ensuing flood.

The policies offered in hurricane-prone regions are definitely a mixed bag, though, with some offering limited coverage and some requiring a higher deductible.

As with homeowners in regions prone to earthquakes, check with your state’s insurance commissioner about government-mandated insurance plans that provide coverage that can’t be obtained on the open market.

Due Diligence: It’s Critical when Buying Insurance

It’s important to take your time when purchasing a homeowner’s policy and to never make assumptions based on the word of the insurance agent.

Learn how to read your policy and change it immediately if it doesn’t meet your needs.

According to the experts at United Policyholders, when shopping for insurance, make sure that you have enough insurance to replace your home (not the land) at full value, that you are protected against regional risks — such as earthquakes or floods — and that you have shopped around for the best price and have received all the discounts to which you are entitled.

In a nutshell: although not all homeowner insurance policies are the same, and they vary in their coverage, a policy typically covers the house and other structures on the property.

Personal possessions inside the home are covered (although pricier items may require additional coverage), as is your liability in the event someone is injured on your property.

Earthquake and flood damage is usually not covered and you will need to buy separate coverage for these events.

If you’re in the market to buy a home and are pursuing an FHA-backed mortgage, you’re not alone. Although the conventional loan is still the most popular, FHA is ideal for those with credit and/or financial challenges.

Because the loan is guaranteed by the American taxpayer, standards differ a bit from conventional loans. One of the biggest differences is the appraisal process.

Since we get so many questions about this aspect of the FHA-backed loan, we thought we’d devote today’s post to clearing up the confusion.

Appraisals, in a nutshell

The home appraisal process has one aim: to determine an estimate of the current market value of a property.

Just as you wouldn’t sell your used car without consulting the Kelly Blue Book or other evaluation guide, so a lender won’t lend money to purchase a home without knowing the home’s value.

Appraisals are performed by unbiased professionals, hired by the lender. The appraiser will visit the home and inspect both the interior and exterior before comparing it to similar sold homes in the area.

FHA appraisals

The appraiser of a home being purchased with an FHA-backed loan must be approved by the U.S. Department of Housing and Urban Development (HUD).

Aside from coming up with an estimated market value, he or she also checks that the property is in compliance with U.S. Department of Housing and Urban Development standards for safety and health.

These standards include:

• All stairways in and outside the home must have handrails.
• There must be at least one closet in each bedroom.
• The home must be free of structural problems.
• Each bedroom must have both access and egress to the outside of the home.
• The appraiser will ensure that the lot is graded to slope away from the home. This prevents moisture from intruding into the basement or foundation.
• The appraiser will also check for the presence of lead-based paint, if the home was built prior to 1978.
• The HVAC system must be in good working order.

Any of these requirements that aren’t met during the appraiser’s inspection must be remedied before FHA will guarantee the loan.

What if the FHA appraisal is low?

If the FHA appraisal amount is less than the amount that you’ve agreed to pay for the home, you still have options. The three most common scenarios are as follows:

• Request that the seller reduce the price to the appraised value. Many homeowners will balk at this. An experienced listing agent will explain to them, however, that no matter who buys the home, if they aren’t paying cash, they’ll need to get a loan and loans require appraisals. There is a very good chance that the next appraisal will be the same, or close to the amount this appraiser determined.
• Increase the amount of your down payment. This reduces the amount of money you need to borrow.
• The buyer walks away from the purchase.

What if you suspect the appraiser is mistaken?

Appraisers sometimes make mistakes. Before walking away from the purchase, ask your real estate agent to run the comps again. If he or she finds that the value is higher than what the appraiser estimated, if the appraiser clearly made a mistake, you may be able to appeal to the FHA.

Unlike conventional loans and appraisals, the FHA has the sole discretion to say yay or nay to an appeal. You’ll need solid documentation of the mistakes you’re claiming. Even then, you may not be granted an appeal. But, it’s worth the attempt.

Speak with your lender about how to start the process and try to enlist the lender’s backing of your claims.

A nationwide real estate franchise firm recently claimed that nearly 60% of their transactions involved multiple offers.

Unlike the bidding wars of the past, these aren’t all deep-pocketed investors who are submitting the winning bids. A buyers’ real estate agent in Virginia related a story about her client who was paying cash for a home.

Since cash offers typically win, imagine that buyer’s surprise when the home went to another buyer who offered almost twice the listing price for the home. In all, the home received 129 offers, according to a story at prnewswire.com.

Although being able to come in over the price others are offering is one way to win a bidding war (and the technique we offer up first, below), keep in mind that there is more to a real estate purchase agreement than price.

This spring’s hot sellers’ market requires an arsenal of techniques and strategies if you’re going to win a bidding war on the home you’ve fallen in love with.

Ensure you win

The best way to enter a housing market that is experiencing multiple offers on homes for sale is to go into the battle with a clear strategy.

Because you may need to make an offer higher than the listing price, plan to shop only for homes priced less than your loan pre-approval amount.

This gives you wiggle room with your money. Hopefully, enough to beat out others who came in at the top of their loan amount range.

Dazzle them with cash

Fortunate are the homebuyers in today’s market who have the means to pay cash for a home, or have in-hand a pre-approval which allows them to bid high.

Buyers who pay cash for a home present a contract with fewer contingencies, such as a loan-approval contingency. Since there is no loan involved in the purchase, they also have the ability to waive the appraisal—an attractive feature to sellers in multiple offer situations.

If you aren’t among these cash-laden homebuyers, read on.

Tweak the contract contingencies

The news is full of stories about homebuyers willing to waive the home inspection (just one contingency in the typical purchase agreement). It’s a risky move and one to consider at length before faced with the decision.

There are other ways to treat contingencies that may be attractive to the homeowner:

• Have the home inspected, but let the sellers know in the contract that their responsibility for problems will be limited to structural issues only.
• Shorten the time allowed in the contract for your contingencies. If the contract states you have 14 days to have the home inspected, offer to have it done in seven.
• A fast-moving market with rapidly escalating home prices puts home sellers on edge when it comes to the appraisal. Homes are selling so quickly, it’s hard to keep up and the appraisal may come in lower than the listing price. To ease the home seller’s anxiety, consider adding an addendum to the contract that you will pay a certain amount more than the appraised value (if you’re budget allows).

“The best offer is a clean offer,” is an old real estate saying and it is never truer than in a sellers’ market. Whatever you can comfortably waive in the purchase contract do “clean up” the offer, do it.

Choose your team carefully

You aren’t alone in this process—at least you shouldn’t be. When choosing your homebuying team (agent and lender), choose carefully. In this lightning-quick market, responsiveness is a quality worth its weight in gold.

You’ll need a team that not only responds to your communications, but to one another as well as the listing agent. Nobody should have to guess at where the others are in the process.

We hope to be a part of your team. Reach out to learn just how responsive we are.

If you’re like us, there are two subjects that make your eyes glaze over: taxes and insurance.

Sure, we learned a lot about the latter with the introduction of the ACA (Patient Protection and Affordable Care Act). We are now somewhat familiar with premiums, deductions, co-pays and the like.

But, that’s health insurance. When you buy a home, you’ll be required to buy certain policies of a different type and some you may want to consider, depending on region.

Let’s start with the basics of mandatory insurance—those policies you may be required to purchase before you close on the home.

Title insurance

The home purchase transaction doesn’t involve just the buyer and seller. Other entities, such as the lender, have interests to protect as well. And financial protection is what insurance is all about in the homebuying process.

When an offer is accepted, the lender begins the process of determining whether the home is worth what you’ve promised to pay, whether you qualify for a mortgage and whether there are any problems with the home’s title.

These problems are known by several nicknames, such as “clouds on the title” or “title defects.”

Is the homeowner who is selling you the home actually the owner and does he or she have a legal right to sell it? Is there anyone else who may have a claim, full or partial, to the property?

The title search will also include learning if there are liens against the home, outstanding judgments and unpaid taxes, among other issues.

The title officer will perform a search of public records to find the answers and then issue a report known as the abstract of title or preliminary title report.

Anything of a negative nature that will affect the lender will be brought to the seller’s attention so that it can be remedied. The lender will not issue funds to you to purchase until this is done.

If the title is clean, on the other hand, the lender will go ahead with the loan, but will expect a title insurance policy to be issued in case anything crops up in the future.

This policy is known as a lender’s policy and it’s required. There is a separate policy to protect the owner, which is optional. Your real estate agent can advise you on whether or not to purchase this policy.

Private mortgage insurance

Homebuyers have a love-hate relationship with private mortgage insurance, or the mortgage insurance premium in the case of the FHA-backed loan.

It’s an additional expense not only at closing, but every month for the life of the loan (in many cases).

Without it, however, borrowers who can’t come up with a 20% down payment would be unable to purchase a home.

Learn more about private mortgage insurance from the Consumer Financial Protection Bureau and you’ll find additional information about FHA’s mortgage insurance premium online at hud.gov.

Homeowners insurance

We’ve so far learned that title insurance protects the lender against future claims against the property, PMI (or MIP) protects them in case you default on the loan.

What happens if the home burns down or experiences another calamity? This is where homeowners insurance enters the picture.

The difference between this insurance and the two previously mentioned is that homeowners insurance also protects the homeowner.

A standard policy is unlikely to cover the home for certain disasters, such as flood and earthquake. If the home is in a flood zone, however, you can purchase a separate insurance policy, under certain circumstances.

“Flood insurance is available to anyone living in one of the 23,000 participating NFIP communities,” according to officials at FEMA.gov. NFIP is short for the National Flood Insurance Program.

Government-backed loans typically require this insurance if you live in a flood zone.

Yes, there is a lot to consider when purchasing a home. Do yourself a favor and consult with your insurance agent early in the process. He or she will help you determine which type of homeowners insurance is right for you and your lender.