DETERMINING THE VALUE
OF A PROPERTY
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 time. This is your money on the line
and it is important 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 sellers 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 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 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, 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
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 {back
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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 influence 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.
More importantly, homebuyers should look at their own individual
situation. If you expect to move within a very few years
after purchasing a home, you 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 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 {back
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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 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", make sure 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 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 do not want 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 than negotiate a fair price with the buyer. He sometimes
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.
During the course of the transaction, it may become evident
that some work needs 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, the seller
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.
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 {back
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The condition of the 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 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.
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, cabinets cupboards, and windows should
open and close easily.
Unevenness: Walls shouldn?t bulge and flooring should appear
even and free of any slopes.
Looseness: You shouldn't be able to see light around the
perimeters of doorways or 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 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, gutters,
electrical work, heating and cooling, insulation, smoke
detectors, kitchen, bathroom and the foundation. The inspector
should be able to point out any items, which may affect
your health and safety. An inspection such as this will
last several hours and cost 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.
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 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,
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, this 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 or email at HQ@ashi.com.
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 they 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
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. 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. {back
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