The Real Estate Blog

Sometimes I encounter people with good credit—but very little wealth—who have recently come into a substantial cash windfall. More often than not, they are very eager to put every last penny of that windfall into a new home.

If you happen to find yourself in this situation, take a moment to consider the value of liquidity before investing everything into a new home.

It’s hard to know know when the need for cash will arise. The need could be anything: plastic surgery, a masters degree, starting a new business, everyday expenses after a lay-off, or an experimental treatment not covered by your health insurance. Who knows what the future holds?

One way of turning your home’s equity back into cash is putting the home up for sale. Aside from the obvious inconveniences of sale preparations, repairs, moving, and finding another place to live—there are also numerous expenses incurred when selling a home (i.e. closing fees, moving costs, rental storage, etc.).

Another popular way to turn equity into cash is the ubiquitous home equity line of credit that banks so eagerly push. A home equity loan is a variable-rate loan secured by the equity you have accumulated in your home. The primary advantage of a home equity loan is convenience: it saves you the time and trouble of selling your home to turn equity into cash. However, this convenience is not free—you will pay monthly interest at a relatively high, variable rate to borrow what is essentially your own money!

To avoid these stressful and costly scenarios, do not put your last dime into a down-payment. Try to keep enough cash in savings—or other liquid assets—to maintain your home and service its mortgage for six months to a year.

20% is the magic number for down-payments. At 20% down, buyers avoid PMI costs (Private Mortgage Insurance) which can add hundreds to the monthly payment. Paying more than 20% will reduce the monthly payment, but larger down-payments yield diminishing monthly savings beyond 20%. So, if you can afford to put more than 20% down, don’t. Put only 20% down to avoid the PMI cost. Put the rest of the cash in safe, liquid, interest-bearing investments that will keep up with inflation.

By preserving your cash with fixed-rate financing, and keeping some of that cash in more liquid investments that will help you keep up with inflation—like CDs, savings accounts, money market accounts, bonds, stocks, REITs, ETFs, and mutual funds—you can still buy a fine home while avoiding the expense and inconvenience of selling or re-financing your home when you need cash.

Every REALTOR® who has been practicing real estate for any length of time has encountered at least one individual who is trying to list or sell a property which he does not own. Before opening negotiations on any property—REALTOR® listed, or for sale by owner—be sure to check the ownership information on the property first.

This information can be readily obtained from title companies or directly through tax records (sometimes the local revenue commission will even provide a web interface for searching local property tax records).

If you ever encounter this situation, keep an open mind and extend the benefit of the doubt. In many cases, individuals trying to sell property without ownership simply misunderstand their rights to the property.

Choice examples:

• Tenants without an understanding of the law
• Handymen working for a cut of the sale proceeds
• Estate heirs trying to sell before probate has officially transferred title
• Life Estate holders who cannot deed fee simple ownership to the buyer

So, regardless of whether you are a buyer or an agent, trust but verify before negotiating the purchase and sale of real property.

When I started selling real estate, my fellow agents gave me a number of Excel spreadsheets to calculate closing costs and monthly payments. As much as I appreciated the gesture, I’m a pen-and-paper person, so I never really used them.

Pen-and-paper served me well for my first few transactionsuntilI ran across a particular customer who was just too impatient to wait five minutes for an estimate of her closing costs and monthly payments. So as much as I dreaded the prospect of lugging a laptop all over creation, that moment I knew it was time to go electronic!

So, I went back to those spreadsheets the other agents gave me. As expected, they didn’t quite jibe with the HUDs from prior transactions… time to bring them up-to-date!

To get the spreadsheets where they could correctly figure closing costs, taxes, homeowner’s insurance, principal and interest, PMI, MIP, and total monthly payments, I had to review my closed files to get a good ball-park average of what vendors and title companies were charging—also had to get per-municipality millages to correctly figure property taxes. Finally, a spreadsheet accurate enough to use in practice!

After using it a while, I got to thinking: “Wouldn’t it be cool if this could be done over the internet without any special software (Excel) where everyone could use it?”, so I put my old computer skills to work to craft a more accurate mortgage calculator for Mobile and Baldwin Counties.

Here it is: http://www.housinghangout.com/mortgage/

Just a few of the things it calculates:

• Closing Costs
• PMI Estimate(if necessary)
• Homeowner’s Insurance Estimate
• Actual Taxes (based on selected municipality)
• Actual Principal and Interest (P&I)
• FHA and VA fees (if applicable)
• Total Monthly Payment

There are all of these “awesome” free e-mail services out there to choose from. Some are provided by your internet service provider (Comcast, BellSouth, SBC, AOL, etc…). Others are provided—free of charge—as part of a web portal’s business plan (GMail, Yahoo! Mail, MSN Hotmail, etc.) Some are even provided by your brokerage or franchise (kw.com, remax.com, Coldwell Banker, Century 21, etc…).

The biggest problem with using these e-mail services can be summed up in a phrase: lock-in.

Internet service providers give us MANY different ways to import our old e-mail into their e-mail systems, but I have yet to find a single one who bothers to provide even a single way for us to export our e-mail archive in their system into another e-mail system!

For example: If you switch from AOL to BellSouth, I can guarantee that AOL’s support representative will certainly not entertain forwarding your AOL e-mail to a BellSouth account. Same thing applies if you’re moving from any internet service provider to any other internet service provider.

Brokerage provided e-mail accounts are just as bad. See what happens when you ask your Prudential broker if he’d be willing to forward your old Prudential mail to your new RE/MAX e-mail address. I think his answer will involve something freezing over…

Another issue is privacy. Google’s highly regarded G-Mail system reserves the right to statistically analyze the content of your incoming and outgoing e-mail and use that information to improve the targeting of their internet-wide advertising colossus.

Two steps to avoid having your e-mail address held hostage:

1. Reserve a domain name. ($8 to $12 a year)
2. Buy POP3 or IMAP e-mail service for your domain name from a hosting company. ($20 - $100 a year)

It’s not free, but domain name ownership is an extremely affordable way to have equity in our own e-mail address, and spares us the greater expense of having our on-line identities held hostage by sub-par internet service providers, unsatisfactory franchises, snooping corporations, and the like.

Most high-end properties come equipped with a sprinkler system. If you find yourself moving into a home with a sprinkler system, it may be wise to resist the urge to use it.

In certain parts of the country, these lawn irrigation systems may come in handy, but that is certainly not the case in the Southeast—especially in the Mobile Bay area. We are the second rainiest area in the contiguous United States after Seattle, Washington!

Under normal weather conditions here, daily irrigation will drown your yard and leech nutrients from the soil—eventually killing the lawn.

So, if you’re moving to South Alabama, leave the watering up to mother nature, and only turn the sprinklers on during a drought.

I mostly work within the city, but a few times a year I show property out in the country.

Generally, people perceive the country to be simpler, idyllic, and peaceful, but personal experience does not agree with the public perception.

Things to look out for in the country:

• Rural residents usually keep many pets—especially dogs! Some are friendly puppies, others are bloodthirsty hounds. Rule #1 when you encounter the latter: show no fear and maintain eye contact. Stare them down! Running is pointless. Dogs run faster. If you can’t stare it down, mace or pepper spray could come in handy…
• Squatters. Vacant country homes with no immediate neighbors have a tendency to attract hobos and the like. Just like the dogs, some are harmless, others… not so much.  Don’t just breeze in they way you would with a suburban home. Lord only knows who’s around the corner.  Again, mace or pepper spray may come in handy…
• Ornery neighbors. People who live close together in rural areas tend to watch out for each other. This is a good thing for the residents, but not such a good thing for an unknown real estate agent fumbling around another person’s home. If you see a neighbor out in his yard, announce your intentions and give him a card. Not only is this a good way to create business, it may also save you from being held at gun point while trying to explain why you were snooping around Mrs. Johnson’s house.
• Gnats. Many rural areas do not use sprayer trucks for municipal pest control. Blood-sucking insects are common. Give yourself a good spraying of pest repellent before heading out.

If you have additional tips for showing rural property, please post them in the comments section. If it’s a good one, I’ll incorporate it into the original post (giving due credit of course).

Sometimes, when a homeowner chooses to put his home up for sale, he will wisely consult with many different REALTORs® to find out which one is the best fit for marketing his home.

During the consultation process, pricing will be a major topic of discussion.

If Agent A suggests an asking price of X, and Agent B suggests a list price tens of thousands higher, ask each agent to go over his research before making a snap decision to list with Agent B, for he could be engaging in a practice we refer to as “buying the listing”.

Buying the listing is the disreputable practice of enticing a potential client with an asking price that has no chance of being met by a qualified buyer in order to secure the listing.

You may ask:

Since real estate agents aren’t paid unless the home sells, why pursue a listing at a price that will not sell?

The answer is simple: free advertising. The yard sign—especially in high traffic areas and highly desirable neighborhoods—is incredible free advertising for an agent. Also, most buyers and sellers find their agent in the process of looking for a home—that is, they seek homes (LISTINGS!), not agents. Having an over-priced home in REALTOR.COM is excellent advertising for the listing agent, but it will not get the home a full-price offer.

So, before blindly listing with the agent who promises the most money for the home, ask each agent to explain how he arrived at the suggested asking price, and make sure that the comparables used to price your home are actually comparable.

One of my favorite things to do in Mobile is to attend student performances at the University of South Alabama.

Quality performances, an eclectic mix of styles (jazz, classical, choral, operatic, etc.), comfortable seating, and an enjoyable evening await you at the Laidlaw Performing Arts Center on the USA campus—weeknights and weekends.

For the music schedule, look at the sidebar on the Music Department’s home page: http://www.southalabama.edu/music/

Tickets for most performances are $5.

Why should a home warranty clause be part of a board contract?

It seems ridiculous that my board contract is a free marketing tool for home warranty companies who provide costly, limited warranties–with trade call fees frequently dwarfing the actual cost of repairs made. On top of that, the home warranty clause is further complicated by the additional “at the expense of the (__ BUYER __ SELLER)” verbiage.

If the buyer is paying for the warranty himself, none of this belongs in the contract in the first place. Since the buyer pays for and benefits from the warranty, and the seller has nothing to do with it, there’s really no reason to establish a “meeting of the minds” through the contract over it.

What if we want the seller to pay for the warranty? Why bother with such complicated itemization? Just adjust the purchase price down by the cost of the warranty and have the buyer pay for the warranty. Ditto for surveys. The net would still be the same for both sides.

One could also ask: Why should a survey request clause be part of a board contract? Our contract has a whole section devoted to whether or not a new survey will be ordered and who will pay for it. Again, if the buyer is paying for it, it’s really none of the seller’s business. If the seller is paying, why itemize?

Speaking of surveys, something that would actually be useful in our standard contract would be a “survey satisfactory to buyer” contingency to address any misrepresentation by the seller and/or his agent(s) over lot dimensions and encroachments. Needless to say, we have no such clause in our standard purchase agreement.

All of this wastes so much time and paper…

From time to time, I get buyers who have a very limited monthly budget which absolutely cannot be exceeded. For these buyers, providing a solid estimate of what their monthly payment will be is crucial to a successful transaction.

Property taxes can be a real “gotcha” in the estimation process, since taxes on a specific property can vary greatly depending on land usage, appraised value, the owner’s age and/or disability status, and assessed value. Another complicating factor is that the property tax year starts October 1^st.

For example:

You have a client closing on a former rental property to use as his personal residence at the end of February. A rental property without the homestead exemption is assessed at 20% of appraised value for tax purposes, whereas with a personal residence, the buyer can claim the homestead exemption and only pay taxes on 10% of the appraised value. Since the tax year doesn’t start again until October 1^st, your client will be stuck paying double taxes for seven months until his homestead exemption kicks in on October 1^st. Some people just can’t swing double-taxes for that long…

When you do have a client on a really tight budget, be sure to check the current Assessed Value on the tax records to determine if it is either 10% or 20% of fair market value.

You can search property tax records for Mobile County here: http://mobilerevenue.siteonestudio.com/TaxBill/search.asp