The best way to
determine property values is to monitor the sale of similar
properties in the same geographical area. This way you can track how
much a home is listing for, how quickly the home sells, and at what
price. Your real estate agent can usually provide information like
this to you and save you some time. This is your money on the
line and it is important that you educate yourself as
much as possible.
The seller will have an asking price on his house. You,
the buyer will have an offering price. The negotiated end result
will be the final purchase price of the property. What the seller
may have paid for the house originally, and how much they would like
to get doesn’t matter. If the seller is sticking to some unrealistic
image of the value of his property, you should just move on. The
price a buyer will pay and seller will accept for his house if
neither party is under duress is known as the "fair market value". Duress can come from different sources. If the seller’s are going
through a divorce and are selling because they are required to by
divorce decree, they may be under duress. If an appraiser knows that
a sale was made under duress they may adjust the appraised value to
conform more to other sales in the area
The Art of Negotiation
Many people are uncomfortable with negotiation.
In this country we will readily pay the market price for
an item even if it means paying too much.
Because no one just pays the sticker price for
a home, buyers need to become a little more
knowledgeable about the negotiation process.
Buying and selling a home can be an emotional experience. Sellers often have emotional ties to a home. Add to that the
necessity of negotiating a price for something that holds so many
memories and it can put you on an emotional roller coaster. A buyer
on the other hand is dealing with large quantities of their own
money. They may already feel insecure about making the decision not
only to put an offer in on a particular house, but also possibly
even to buy a home in general. There are many reasons why emotions
might enter into what should be a detached business transaction.
Since it is impossible to completely eliminate all
emotions involved in the transaction, you must try to at least
control them. The person who controls their emotions the best
usually ends up with the best deal.
A good negotiator applies a few basic principles to the
negotiation. They can increase your odds of a negotiation working
out to your advantage.
Be Realistic
Get your facts first. Have comparable recent house sales
supplied to you from your Realtor. With these facts you can obtain a
fair assessment of a reasonable offer to make on a house. Don’t just
pull a figure out of thin air.
If you have been prequalified or preapproved for a
mortgage loan this fact needs to be stressed when your offer is
made.
Don’t ask for unreasonable corrections before you have had
a chance to review inspection reports. Allow the reports to offer
you the factual information. At the time you review the reports you
can use property inspection clauses to renegotiate certain areas of
your contract.
If the sellers agree with your initial offer, they will
sign it. At that point you have a ratified offer. The contract
should still contain certain contingencies. It is these
contingencies that give the buyer an out. Two very common
contingencies are for financing and property inspections.
Were you approved for the loan specified in the
contract? If not, you can turn away from the deal.
Property Inspections
You can pull out if you don’t approve of the inspection
reports or can’t agree on what repairs need to be done, and who
should pay for them. Usually you will find that a reasonable
contingency will be allowed.
Don’t delay obtaining a signed purchase contract on a home
that you really want. Negotiate the price, if the seller agrees he
will sign. If you spend too much time before hand on dickering, the
seller could very well get tired and sell the home to someone else. Negotiation is an on-going process. Once a price has been agreed on
the rest can be negotiated through the contingencies already built
into the contract.
Counter offers
Counter offers allow both buyer and seller to change some
or all of the terms of the initial offer. If the seller agrees to
some but not all of the conditions in the first offer he can have a
counter offer drawn up to express the changes he would like to make. Likewise the buyer can come back with a counter-counteroffer to make
changes. Hopefully a middle ground will be reached and agreed
upon and the counter offer is signed and ratified.
Styles of negotiation
There are really only two main styles of negotiation. The
two main styles of negotiation are combative and cooperative. A
combative agent may be ruthless and take no prisoners. He may fight
hard to get you the sales price and other considerations you are
looking for. But he may be so difficult to work with that other
agents shun him. If that is the case, he could lose you the deal. In
a sale where there are close multiple offers on a property the agent
who is easier to work with will probably win out over the difficult
agent. In such an instance you would have been much better off
having someone who is not such a fighter.
Why Do Home Values Sometimes Increase and
Decrease?
Just like nearly everything else, it is supply and demand
that influences home prices. The demand for the prices of homes in
an area are driven by the economic health and vitality of the area. When there is an increase in jobs, especially higher paying jobs,
there will be an increase in the price of homes in that area.
The real estate market will usually experience several up
and down times during the
average time that a person owns a home.
It is difficult to ever try to "time" the market and buy
when it is at rock bottom and sell when prices have
reached their peak.
What is more important is that the homebuyer looks at
their own individual situation. If you expect to move within a very
few years after purchasing a home, you will need to take a good look
at market conditions. Is housing a good value right now? You would
not want to buy for just a few years and have housing prices fall.
What Drives the Market?
When you look at the purchase of real estate as an
investment you need to look at several things. Of course, when you
buy a home you are not just looking at the purchase as an investment
alone. There are other more personal reasons for buying a particular
property.
Jobs
The abundance and quality of new jobs in a community
directly effect the demand for housing. People often relocate where
there is employment, especially if it offers better pay. Better pay
and demand for housing, will drive the cost of housing up.
It is also important to look at the diversification of
jobs. If the community only offers jobs in one or two industries,
what happens if those industries start to go under?
Housing Availability
If there is an over-abundance of housing, home prices may
remain stagnant even in an area with considerable job growth.
You might want to check vacancy rates in the community in
which you plan to live. A low vacancy rate is usually a good
indicator of lower housing availability, and therefore appreciating
prices. The vacancy rate is calculated by dividing the number of
empty rental units by the total number of units available. A vacancy
rate of 5% or lower is a good indicator of future appreciation. It
is the competition for rental housing that drives rental rates
upward. When renting becomes more expensive it is no longer as
attractive to rent.
You also might be concerned if there is a significant
increase in the number of building permits being issued. This could
be signaling a future glut in the market. This can often happen
after there has been a sustained period of appreciation in housing. Builders will then rush out for building permits to take advantage
of the increased prices.
The supply of housing is also determined by the amount of
land available for development. If there is little land
available, demand will often rise.
Properties Listed For Sale
The number of properties that are currently being listed
for sale usually remains fairly constant. As homes are purchased,
new houses usually are listed to take their place.
If housing prices increase significantly however, you may
start to find more and more homes being listed. This is because
current homeowners want to take advantage of this increase and sell
now. It is the competition between new sellers for the available
buyers that will start to lower the price of housing.
If the local economy is strong, interest rates
are low, and the cost of homes is almost the same as the
cost of rentals, there is a high incentive for renters
to become buyers.
The market
Ultimately it is the market the will dictate who comes
from a position of strength. In a buyers market, sellers are often
heard complaining about how they can’t get a fair deal. In a sellers
market, a seller can ask for the moon, and have several different
buyers willing to try and get it for them.
In a sellers market a buyer can be easily caught up in a
bidding war over a property. A smart buyer should not try to play
that game. Too often the winner becomes the loser. In a
bidding war the price that is finally accepted can often
be well over the fair market value of the property.
There are ways to improve your chances in a sellers
market. Go over the comparable sale data and use it to determine the
maximum of what you will pay. This will help you to stay realistic
and not get caught up in a bidding frenzy.
Try to find out what you can about the seller’s needs
before making an offer. Maybe you can offer some need that has not
been considered by any of the other offers. You could offer an extra
long close of escrow or maybe agree to purchase the home "as is". If
you do offer to accept a property "as is", just make sure that you
go over all inspections very carefully, so you can get out of a deal
if the work that needs to be done becomes more then you ever
envisioned.
Always try and make your best offer your first offer. In a
bidding war, you may never get a chance to make another.
Have your loan approval in hand. You should always come
out ahead of buyers who do not. Sellers do not want to have to worry
about whether or not a buyer will get a loan.
Have your home sold if you need to sell one. If your offer
is subject to the sale of another residence you will almost always
lose out in a bidding war. Sellers to not want to have to wait
around for that if they don’t have to. Also if your home is
already sold, you will know how much money you have to
negotiate with.
Try not to let the seller know if you have any urgent time
constraints. If you waited until the eleventh hour to purchase a
property in order not to pay Uncle Sam any capital gains taxes,
don’t let that be known if possible. Lets say you’re only 10 days
away from the deadline and you need to close escrow by that time. The seller can hold that over your head and make you pay for
everything not already agreed upon up until that time. Keep
personal information as much as possible to yourself.
Sellers Concessions
In a buyers market, the seller often finds that he must do
more then just negotiate a fair price for the buyer. He sometimes
also needs to offer concessions. Concessions are credits to the
buyer for items such as non-recurring closing costs or corrective
work.
Non-recurring closing costs are one-time charges. They
cover such things as charges to obtain financing such as appraisal
fees, credit report fees, and loan points. This can total from 3 to
5% of the purchase price so having someone pay those costs can be a
major concession.
Now it’s always possible to request a reduction in the
purchase price by that amount too. A reduction in the purchase price
would also save you money on property taxes since taxes are computed
by the purchase price. But if your finances are tight, coming up
with the down payment and all of the closing costs and recurring
costs can be hard. This is especially true if not paying for the
closing costs would allow you to put 20% on the property. By putting
the 20% down you will save yourself additional monthly costs that
could really save you some money. It is also not a good idea to use
all your available funds to buy a house. Lenders often require (and
it’s also in your best interests) to have additional funds available
to you after close of escrow.
If during the course of the transaction it becomes evident
that there is some work to be done on this property. The cost to
complete that work can also be a concession given to the buyer by
the seller. The seller has to take into consideration that if you
back out of the deal because there is too much additional cost
involved to complete the work, that seller still has to find another
buyer and disclose the whole situation to that buyer as well. It
might just be easier to negotiate with the buyer at hand and get the
deal closed.
Funds can be left by the seller in escrow to cover the
estimated cost of repair. The seller can also issue a credit
directly to the buyer and the buyer can have the work done at any
time. Lenders as a rule do not like to do this. It
places doubt on whether or not the work will ever be
completed.
Throughout the transaction make notes on conversations
that were held. If a lender quoted you a certain rate make a note of
the day and time. If a deadline may have to be moved up a week
because of some unforeseen circumstance, make a note of the request
and the response. If the seller agrees upon an extension of time,
obtain the extension in writing to protect yourself.
Protecting Your Investment
Buying a home is usually the biggest expense you will ever
have. It only makes sense to protect that investment by having it
properly inspected and insured.
The Home Inspection
The condition of your home will have a tremendous effect
on its value. It is important to have a professional inspect
the property so you can ease your mind that there are no
major problems.
Inspections of property come in two general categories-
Latent and patent. Patent defects are obvious to see. A professional
doesn’t need to tell you there are large water stains, or cracks in
the walls. A professional will tell you if these things amount to
major problems or are mostly blemishes.
Latent defects are hidden. The are located behind walls or
underneath flooring. They can be plumbing or wiring defects and even
effect your health, like lead in the water, or asbestos in the
ceiling.
Problems with title to the property can also be something
that a professional can help to locate.
There are some things you can find yourself if you know
what to look for. You should be aware of this information, but never
let it allow you from not having a professional inspect the
property. Money saved from omitting a professional inspection can
amount to much more money lost down the road.
Moisture: Water stains on ceilings, walls and
floors. Actually feel the basement walls for dampness. Does
something smell moldy? Where is it coming from? Check for
standing water both inside and outside of the property. This
could indicate problems with drainage. If you see a sump
pump in the basement or garage that should tell you right
away that there are problems here.
Cracks: Go around the foundation, interior and
exterior walls, fireplace and chimney. Check the basement
floors, garage, driveway and walkways. If you can stick your
finger into the crack it is considered to be large
Stickiness: Doors, cabinet’s
cupboards, and windows should open and close
easily.
Unevenness: Walls shouldn’t bulge in places and
flooring should appear even and free of any slopes.
Looseness: You shouldn’t be able to see light
around the perimeters of doorways and windows.
Termites: Check for long mud tubes along the
foundation or in the basement. Any part of the house that
comes in contact with the earth should be paid closer
attention to. Check for decay and rotting wood.
Land Stability: Check the hillsides immediately
behind the property. Do they have netting on them, or show
any signs that the earth has moved?
Let your property inspector know of your concerns
before the inspection. Get their opinion on what concerns
you.
Don’t assume because the house you are buying is
brand new that it doesn’t need to be inspected. Builders
have been known to cut corners and to make mistakes.
Types of inspections
General
The types of inspections you get depend on the type of
property itself and its geographical location.
Complete inspections of the properties interior and
exterior. The inspector should cover such things as the roof and
gutters, electrical work, heating and cooling, insulation and smoke
detectors, kitchen, bathroom and the foundation. The inspector
should be able to point out to you any items, which may affect your
health and safety. An inspection such as this will last several
hours and cost somewhere between $200 to $500. If there is something
that causes a concern to the inspector he could require another
inspection by an expert in the field for which he is concerned.
Pest
A pest inspector will only check for wood damage caused by
wood destroying insects. If the presence of these insects is
detected, the home will have to be specially fumigated to destroy
the insects.
General Contractor
If you plan on purchasing a fixer upper you should consult
a general contractor or an architect for an inspection of the
property. You would also do this if once the home is purchased you
have plans for a major renovation. A contractor or architect can
tell you if what you want to do is structurally possible. They can
also give you important time and cost estimates. Listen to the
recommendations given by these experts but remember that they will
usually provide an inspection free in the hope that they will be
getting the work. In that case their opinion would not be
completely objective.
Unfortunately most home inspectors do not go through a
certification or licensing process. If an inspector suggests doing
any of the corrective work that they feel is warranted that should
send an immediate signal. This inspector many have an ulterior
motive. Make sure you hire someone who only does inspections. That
way there is no conflict of interest.
Friends and business associates can recommend inspectors. Your Realtor also should have a list of inspectors they use. Be on
guard against the Realtor who uses an inspector because the
inspector is so lenient that they never kill any deals.
The American Society of Home Inspectors (ASHI) requires
that an inspector perform 250 home inspections and pass two written
tests before they can join. Although that does not guarantee a good
inspector it certainly helps. You can contact ASHI at 800-743-2744.
You should interview several inspectors before you hire
one. Ask them if they are doing this on a full time basis. How big
is their company and how long has it been in business. Is there
insurance against any error or omissions in the report? This way you
will be covered in case something is missed or is incorrect. How
many inspections has this inspector performed in the last year? Do
they have any special licenses or certificates? Exactly what will be
covered in the inspection? Make sure the will cover any structural
and mechanical systems from the roof to the foundation. Will the
inspection take approximately 2-3 hours? A proper inspection
requires that at least this much time be spent at the site. Also ask
about the report itself. The report must be in writing and clearly
explain the findings of every item of inspection. A good inspector
should want you to accompany them while they make the inspection. That way they can point out certain things directly to you.
Always make your offer to purchase contingent on your
approval of the property inspection. If the sellers have any
inspections that they have already ordered or that were ordered by
previous prospective buyers you should ask to see them. If any
work is required to be completed, make sure you also
obtain bids from qualified professionals for the work to
be done.
If the inspection comes with a warranty plan to cover some
of your homes major systems or appliances that is fine. Do not pay
any additional cost for this plan yourself though. Such plans
usually have very explicit stipulations. You would be better
off using the inspection to have certain items corrected
and spending your money there.