Resources For Buyers and Sellers

How to Avoid Getting Ripped Off When Buying Your Next House or Condo
A special report from Real Estate Expert Bob Bruss

Spring is the best time of the year to be a home seller in most communities. Of course, there are exceptions in resort areas where the peak sales season may be mid-winter (such as Florida and Arizona) or mid-summer and early fall (such as summer resort areas). If you are a home seller, to maximize your sales price you want to be ready to take advantage of the key time of the year in your area when the most homebuyers are shopping in your local marketplace.

But this newsletter is primarily for homebuyers, not sellers, if you are a home buyer, the obvious first step to avoid being ripped-off by home sellers is to avoid buying during the peak home buying season in your town. Wait to buy until the “off season” or “slow season”, in most towns, that’s usually between Thanksgiving and New Year’s when only the very serious buyers and sellers are in the local marketplace.

EXAMPLE: Where I live near San Francisco, the home sales market has picked up during the last few weeks so much that we are now seeing multiple purchase offers on “correctly priced” homes. On these well-priced homes listed for sale up to about $l million, it’s a “seller’s market” (that means there are more qualified home buyers than there are homes available for sale).

Don’t fall for the under-priced house rip-off. Before moving on, this is a good spot to emphasize a dirty little trick some realty agents and home sellers use to stir up artificial buyer interest in a house. By deliberately under pricing a home’s asking price, buyers usually flock to make purchase offers on that house. The result (already pre-planned by the home seller and the listing agent) is to create an artificial auction of buyers competing to buy the under priced house, thus driving up its ultimate sales price. Sellers profit from auctions, not buyers!

This dirty trick is dishonest to set an artificial asking price, which the home seller has, no intent to accept even if a buyer makes a full price, all cash, no contingency purchase offer. Deliberate under pricing certainly violates the Golden Rule of doing unto others as you wish they would do unto you. If you find yourself in such a situation, the best thing to do is walk away and don’t make a Purchase offer on that intentionally under priced home. If you get caught up in the bidding frenzy of competing with other potential buyers, you’ll probably pay too much for the residence.

WHY ARE HOME SALES DOING SO WELL? Just last week, I received new statistics about nationwide home sales volume and prices. Depending on whose statistics you believe, the National Association of realtors, the National Association of Home Builders, U.S. Dept. of Commerce, or other sources such as the Mortgage Brokers Association — home sales volume and prices are robust just about everywhere (with a few exceptions due to local economic problems).

The apparent reason home sales are holding up so well in most areas is prospective home buyers expect interest rates to rise as we come out of our short recession so they want to buy a new or resale home now before it’s too late. Although home mortgage interest rates have risen a little in recent weeks, fixed rates are still very affordable around 7%. Adjustable rate mortgages (ARM) are around 5% for a locked-in ARM for the first five years; after that when the interest rate adjusts to the market rate in five years, the borrower should pray for low interest rates then.

You can get one, three, five and even seven-year locked-in ARM mortgages, which are often easier to qualify for than fixed, rate home loans. If you plan to sell the residence before the lock-in rate expires, an ARM can be a “good deal.” However, beware of ARMs with negative amortization (called “negative am”). That means the interest rate adjusts periodically, sometimes as often as monthly, but the mortgage payment remains fixed for the lock-in term, such as five years. Any unpaid interest is added to the principal balance. The unhappy “rip-off’ result, due to “negative am” could be the borrower owes more than the original loan balance. Avoid “negative am” ARMs!

DON’T GET RIPPED-OFF BY YOUR MORTGAGE LENDER. Whether your town is now in a buyer or seller home sale market, the first step for prospective homebuyers (before shopping for a home) is to get pre-approved in writing by an actual home loan lender. Unfortunately, for too many homebuyers, the mortgage lender is the first opportunity to get ripped-off.

Before contacting a mortgage lender, please invest $12.95 at the website www.myfico.com to obtain (1) your credit report and (2) your FICO (Fair, Isaac and Co.) credit score. The big advantage of having your credit report and FICO score is you will then know if you are a strong borrower or if you are a weak borrower who should be “flexible” and accept whatever home loan is offered. FICO scores range up to 850. If your FICO score is 700 or above, you’ll have no trouble getting a mortgage, even in the high 600’s, you should be able to qualify. But a FICO score below 650 will probably mean you must pay a high interest rate and substantial loan fees.

Although the focus of this newsletter report is not about how to obtain the best home mortgage, let’s stop briefly to discuss this important topic because it’s too easy to be ripped-off by the lender. My suggestion is to get pre-approved in writing by an actual lender for the maximum mortgage you can obtain. Why? Unless you are independently wealthy, it’s never a smart idea to tie up a large amount of cash in one asset — just in case you make a mistake!

EXAMPLE: Suppose you buy a condo in a complex, which then goes bad because too many renters move m. Most lenders won’t make home loans if there are more than 25% to 30% renters. If you foolishly paid all cash for your condo, you might find yourself unable to sell your free and clear condo in a complex where lenders won’t loan because there are too many renters. However, if you purchased the same condo with a 100% mortgage, when you decide to sell, the mortgage lender will probably allow your buyer to take over your existing mortgage by assuming its obligation. In other words, because you bought with a large mortgage you didn’t tie up a large amount of cash.

The importance of getting pre-approved in writing by an actual lender — before shopping for a house or condo — cannot be overemphasized. Pre-approval solves many problems, such as (1) knowing the maximum mortgage for which you can qualify, (2) shopping for the right price range house or condo, (3) assuring the seller and the realty agent you are qualified to buy the home, and (4) in competitive bidding situations, standing out ahead of any other home buyers who are not pre -approved in writing for a mortgage. Mortgage pre-approval shows you are a serious homebuyer.

Almost as much attention should be paid to shopping for a mortgage as shopping for a home. Ask friends, business associates, and recent homebuyers for their recommendations of local mortgage lenders. The individual loan agent is usually more important than the type of lender. To illustrate, I’ve recommended my mortgage broker friend Don Douglass, owner of ServiCentre Mortgage in San Carlos, CA, to several borrowers who all obtained mortgages through him. One couple had such bad credit it took Don almost six months to get them a mortgage, but he never gave up solving their many credit problems. Just a few weeks ago, Don arranged a mortgage for another friend who was in the process of getting a divorce and whose ex-wife messed up his credit. That’s the kind of a home loan lender to seek in your community.

Please be aware there are three types of lenders: (1) mortgage brokers (who will “shop” your loan application because they represent dozens of lenders who loan their money through mortgage brokers who obtain loan applications from borrowers), (2) direct lenders (such as Wells Fargo, Bank of America, and Washington Mutual), and (3) mortgage bankers (such as Countrywide) which loan their own money but usually quickly resell their home loans in the secondary mortgage market, often retaining the loan servicing.

Which type of mortgage lender is best? There is no correct answer to that question. Personally, I’ve had good and bad experiences with all three types. Here are a few suggestions: (1) If you have any credit or income problems, or if the property you are buying is “unique,” top-quality mortgage brokers can usually arrange “impossible” mortgages, often with out-of-area lenders (but at a slightly higher than market interest rate and fees), (2) direct lenders have a limited range of loans available but if you fit their categories, they usually have the best terms, and (3) mortgage bankers are often the most flexible and creative.

Watch out for “bait and switch lenders.” These loan agents will promise you fantastic loan terms. However, after you fill out their loan application, wasting valuable days and weeks, the dishonest bait and switch lender will tell you the loan market changed and here are the best available terms. Homebuyers are most vulnerable to these con artists who often wait until a day or two before the scheduled home purchase closing date to tell the borrower the bad news about the changed loan terms. At the closing date, it’s too painful to walk away and start over with another lender. However, homeowners who are refinancing will often walk away from a bait and switch con artist lender (unless the borrower desperately needs to close the refinancing, perhaps to take out some tax-free cash).

Internet lenders are still developing. My experience has been the Internet is a great place to begin your mortgage shopping. I’ve only obtained one Internet mortgage so far, but it was a very pleasurable experience (it was a Wells Fargo home equity credit line on my out-of-state condo). Some of the Internet website loan calculators are great for determining how large a mortgage you can afford, depending on your available cash down payment. A great book with many Internet mortgage sources is Randy Johnson’s “How to Find a Home and Get a Mortgage on the Internet” (John Wiley and Sons, New York, 2001), available in stock or by special order at local bookstores, public libraries, and www.amazon.com.

By the way, don’t let lack of a cash down payment stop you from buying a home. If you have good income and good credit, you can probably qualify for 100% financing with at least one lender! Some lenders will even make up to 103% mortgages so you can include the closing costs in the mortgage! However, if you have unstable income and/or poor credit, you probably won’t be able to get a 100% mortgage.

COMPARE THE APR (ANNUAL PERCENTAGE RATE) AND INSIST ON AN ACCURATE “GOOD FAITH ESTIMATE” OF LOAN COSTS. Before leaving the topic of where to get pre-approved for a home loan, after you fill out a loan application with a lender, insist on receiving an accurate statement of the loan APR and a written “good faith estimate” of loan costs. When buying a house or condo, it’s a good idea to pay a one or two point loan fee (each point equals 1% of the amount borrowed) to “buy down” the loan interest rate because that loan fee is fully tax-deductible in the year paid to obtain a “home acquisition mortgage.” However, when you refinance in the future, it’s best to obtain a so-called “no cost” refinance mortgage with no loan fee because loan fees paid on refinanced mortgages can only be deducted over the life of the mortgage.

Pay special attention to any unusual fees on the “good faith estimate” of loan costs (which the lender must provide within three days of receiving your loan application). When you eventually close the loan to buy your home, perhaps a month or two later, don’t let the lender add any new

100% pure-profit “rip-off’ junk or garbage fees. Examples of unnecessary junk or garbage fees include administration fee, warehousing fee, documentation fee, underwriting fee, preparation fee, etc. These unnecessary, expensive junk fees should be included in the basic interest rate and the lender’s up-front loan fee with no extra cost surprises at the closing.

DON’T BE IN A HURRY TO BUY A HOME. After you are pre-approved in writing by an actual lender (not just pre-qualified, which means “we think you might qualify for a mortgage”), it’s time to start the serious quest for the right home for you and your family.

Please don’t be in a hurry to buy. Finding the right house or condo often takes six months, sometimes longer. If you are relocating, unless you have a large family and absolutely must buy a large house almost immediately, don’t fear renting an apartment for a few months. Of course, don’t sign a 12-month lease if you hope to find a house or condo within six months!

Real estate agents love to work with corporate relocation homebuyers. The reason is most of these people are in a hurry to buy and won’t be too fussy. These corporate relocation buyers often get ripped-off by (1) overpaying for the home and (2) not checking all the details carefully, such as school quality.

WORK WITH A HIGH-QUALITY BUYER’S AGENT. After getting pre -approved in writing for a maximum mortgage (you don’t have to spend all that mortgage money, but it’s nice to know you have it available), and realizing it’s smart not to be in a hurry to buy a home, the next step to a successful purchase without getting ripped-off is to work with a high-quality buyer’s agent who specializes in the location where you want to buy a house or condo. If you are considering several locations, don’t expect one buyer’s agent to be an expert in all areas. You might need two buyer’s agents, one for each location where you are considering a home purchase.

In the past, many home buyers worked with agents they thought represented only the buyer —but the truth was those agents were often really sub-agents of the listing agent, working primarily for the home sellers. After costly litigation, primarily the famous Edina Realty lawsuits, real estate agents pressured state legislatures to pass agency disclosure laws. Today, most states require realty agents to disclose in writing to buyers (and sellers) who they represent in the transaction. When you make a purchase offer, to prevent misunderstandings, be sure your buyer’s agent provides a written agency disclosure.

This can get a bit complicated. But it is very important for homebuyers to understand who represents whom in the home purchase.

EXAMPLE: Suppose you visit a Sunday afternoon open house and meet the listing agent. You like the house and want to make a purchase offer. If you make your purchase offer through the listing agent, she can either (1) continue representing the seller only (leaving you with no agent to look out for your best interests), or (2) represent both seller and buyer, acting as a “dual agent.” There is also a third possibility — you can find another agent to represent you exclusively as a “buyer’s agent.” When a buyer’s agent presents your purchase offer, the listing agent usually splits her listing commission 50-50 so the seller will really pay your buyer’s agent.

Finding a superb buyer’s agent is not easy. Most experienced real estate agents prefer to concentrate on listing houses and condos for sale. The reason is the listing agent controls the sale, whether the listing agent or a buyer’s agent locates an acceptable buyer. There’s an old real estate sales motto (which is very true) that “Listers last.” But there’s another real estate sales motto, equally true, that “Buyers are liars.” That means home buyers often tell realty agents “untruths” such as their income, cash available for down payment, etc. By being pre-approved for a mortgage, you’ll eliminate any question about being able to buy a home in a specified price range. Most experienced realty agents who prefer listing rather than selling will also work, from time to time, with buyers they like. Another source of a buyer’s agent is new licensees who have virtually no choice so they are forced to work with buyers if they want to get started in real estate sales.

The best way to find an outstanding buyer’s agent is to ask for recommendations from friends and business associates. Although I am a real estate broker, when I was in a “buying mode” and bought many rental houses, I especially enjoyed working with an excellent buyer’s agent, the late Betsy White. She was primarily a listing agent, but she also worked with a few repeat buyers like me. Her perseverance was outstanding. When I would have given up with an “impossible seller,” Betsy often took weeks to negotiate a purchase for me. If it weren’t for Betsy, I wouldn’t own my home today. She never gave up on my sellers — especially the husband who was a very “difficult” person. That’s the kind of buyer’s agent to seek. But they aren’t easy to find.

Beware of the “message bearer” buyer’s agent. I recall one aggressive local buyer’s agent who knew I bought rental houses and he wanted part of the sales commission on at least a few of my purchases. When he showed me a suitable listed house (which was not his listing), I made a reasonable purchase offer through him. He presented my offer to the seller. Then he delivered the seller’s counteroffer to me. Next, I made a counter-counteroffer. The seller counter-counter-counter offered. After that, I realized this agent was just a “message bearer” who wasn’t doing anything to negotiate a purchase price I could afford. Needless to say, this is not a desirable type of buyer’s agent. A more preferable type is like Betsy White who was a buyer's advocate, rather than just a message bearer.

However, on a few houses, which Betsy sold me, she was also the listing agent so she acted as a “dual agent” and could not represent me exclusively as a buyer’s agent. For the realty agent, it is very difficult to be a dual agent because that is an inherent conflict of interest. However, disclosed dual agency is perfectly legal in every state. On several occasions, when I bought a house for investment through a dual agent, that agent then had leeway to “adjust” his sales commission (because there was no other agent involved), making a sale which otherwise might not take place.

CONSIDER THE IMPORTANCE OF HOME LOCATION AND “MUST HAVE” FEATURES. Fortunately, we’re all different. Some of us like living in small towns. Others enjoy city life. Many enjoy single-family detached houses, where we can have a yard and turn up the TV or stereo volume without fear of disturbing our neighbors. But many folks prefer townhouses and condos where the homeowner’s association takes care of the outside maintenance.

For most of us, where we work and how much we earn determines where we can afford to buy a home. Choosing a home location is usually a series of compromises. My suggestion is to write out a list of “must have” features, such as three bedrooms and two bathrooms, good schools, and a safe neighborhood. Then make a list of “desirable” but not absolutely required features, such as a view and a swimming pool. Bearing in mind no home is 100% perfect, then it’s time to shop for an affordable location with homes likely to include your “must have” features.

EXAMPLE: My friends Cheryl and Kevin recently bought their first home. They had been renting a three-bedroom house, but with three little boys, they needed a larger residence and good nearby schools. They’ve been shopping for a home for years! When Kevin changed employers about a year ago, their search focused in a completely different direction within the same general area. To my surprise, last month Cheryl (who arranges the printing of my newsletters) told me they bought an almost-new four-bedroom home in Gilroy! In case you’ve never heard of Gilroy, it is south of San Jose, and is famous as “The Garlic Capital of the World!” Fortunately, Kevin is able to take a commuter train to his job and their large new home is within walking distance of a new elementary school.

EVEN IF YOU DON'T HAVE CHILDREN, CONSIDER THE SCHOOL QUALITY. Bad schools attract bad families and repel good families. Can I be any more blunt? High buyer demand helps home market values appreciate. If few people want to buy a home in a community with bad schools, home market values will stagnate because prospective buyers will avoid buying there.

As part of your home location choice, check out the school quality for the areas where you are considering buying a home. You don’t need to be in the top quality school district for your area (although that’s a very good idea). But you want to be in one where the schools are comparatively well rated and don’t have crime or other serious problems.

A sharp buyer’s agent can easily provide you with the latest school quality test scores for the communities you are considering. If the agent can’t or won’t provide this information, get rid of that bad agent. He or she is lazy and not looking out for your best interests. Every well-managed real estate brokerage office has school quality information easily available to the sales agents. Once you narrow down your home search, drop in for a brief visit to the nearest elementary, middle and high schools. Usually, you’ll need to check in with the school office. While you’re there, ask if they have any information about the school for prospective nearby homebuyers. The best schools have such information readily available because they are very proud of the accomplishments of their teachers and students.

However, don’t be put off by the quality of the school facilities (unless they are really bad). Many school districts choose to put their money into teaching rather than fancy facilities. Yes, schools need computers and all that. But ask about the average class size. If it’s over 25, that’s not a great school district and they need to hire more teachers. In the ultra-important grades K-3, the class size should be around 20.

BEGIN SHOPPING FOR YOUR NEXT HOME ON THE INTERNET. Depending on whose statistics you believe, at least 50% of today’s homebuyers begin their quest on the Internet. The most popular site is www.realtor.com. However, a major drawback of this site, which is supposed to include the entire local multiple listing service (MLS) listings for every community, is it is often not up-to-date. Pending sales usually aren’t disclosed. New listings seem to take a long time to get posted. But this website shows what is available in a community, asking prices, and listing agent names, phones, and e-mail addresses. Don’t hesitate to use this valuable resource, as well as other Internet home listing sites, as a starting point for your home search.

HOW TO AVOID BUYING A “BAD HOUSE” (OR CONDO). Now that you’ve been pre-approved in writing by an actual lender (not a mortgage broker), selected one or two locations for home purchase, and begun working with your buyer’s agent who is should be showing you several houses or condos each week, it’s time to make a buying decision when you inspect one you like.

However, just because your buyer’s agent is looking out for you, that doesn’t mean you should stop looking on your own. Spend Sunday afternoons visiting as many realtor open houses as possible (you’ll find them advertised in the local newspapers). You’ll usually be able to inspect at least six to 12 homes. Many of these are brand new listings, which are not yet in the local multiple listing service (MLS) database.

As you enter each open house residence, be sure to inform the realty agent you are working with a buyer’s agent. Of course, be very friendly with the agent holding the open house (ask if it is the agent’s own listing or if the agent is holding the open house for another agent). If your buyer’s agent has given you a dozen business cards (as your buyer’s agent should), don’t hesitate to hand a card to the agent if you decide you are seriously interested in the house. Then there will be no hard feelings. DO NOT waste the realty agent’s time if there are other serious buyers looking at the house. Neither should you tie up the realty agent with lots of questions and then spring it on him or her that you’ll be making your purchase offer through your own buyer’s agent.

Ask to see the seller’s home sale disclosure statement and ALL inspection reports already obtained on the residence. Whether you are shown the home by your buyer’s agent, or you “discover” it on your Sunday afternoon open house tour, if you are seriously interested in possibly making a purchase offer, ask to see copies of the seller’s disclosure statement and ALL inspection reports which have been prepared, such as by pest control or professional home inspectors. The best listing agents have this information easily available for serious buyers.

If you learn the seller has not prepared a disclosure statement and there have not yet been any inspection reports made, that is a major signal of a lazy listing agent who is not doing his or her job correctly. Smart home sellers get these reports, have any necessary repairs made, and can then proudly show them to serious prospective buyers.

However, if you want to make a purchase offer to buy the house, don’t hesitate just because there aren’t any reports yet. But your purchase offer should then contain contingency clauses for your approval of the seller’s disclosure statement, a professional home inspector’s report (hired by you), and, if customary in the area, a pest control (termite) inspector’s report. Ask your buyer’s agent if other reports are locally required, such as for energy efficiency, radon, and building code compliance. Make your purchase offer contingent on your approval of those reports. Also, if you don’t approve the reports, then you can get your good faith earnest money deposit refunded. Even if the home seller has already obtained all the reports, you might want to hire your own inspectors after the home seller accepts your purchase offer.

EXAMPLE: Several years ago, I decided to sell a rental house. Although I am a real estate broker, I always make it a policy to list my properties for sale with a superb local realty agent (because I know he or she can be more objective and will work harder to sell the home than I will). In this situation, my excellent agent Larry Emerson (who now sells homes with RE/MAX in Colorado Springs) recommended a home inspector who I hired. The inspection report showed nothing wrong. However, the buyer’s inspector (a retired contractor) found a dangerous electrical situation in the attic (which I, of course, immediately had corrected) and the lack of a spark arrestor on the chimney. I’m glad the buyers hired their own professional inspector to double-check on my inspector. Incidentally, always accompany your inspector to discuss any defects discovered. I recommend home inspectors who belong to the American Society of Home Inspectors (ASHI). You can find them at www.ashi.com or 1-800-743-2744.

HOW TO MAKE AN INTELLIGENT HOME PURCHASE OFFER: The market value of houses and condos is determined by recent sales (not asking) prices of comparable nearby homes. Before making a purchase offer, ask your buyer’s agent to prepare a written comparative market analysis (CMA). This is the same form, which was (hopefully) prepared by the listing agent for the home seller. It shows recent sales (not asking) prices of similar neighborhood residences. The CMA should also include asking prices of nearby homes currently on the market for sale (perhaps another residence is a better buy!). Finally, a CMA shows recently expired listings, which didn’t sell — perhaps because they were overpriced.

With the help of your buyer’s agent, who should have inspected each of the recently sold and currently listed homes, you can add or subtract value for the pros and cons of the home you want to buy. To illustrate, if the home you want to purchase doesn’t have a swimming pool but five of the six recent “comp” home sales have pools, you’ll need to adjust for that. Or, if the home under consideration has a den, but the others don’t, then add some value for it. I’m sure you get the idea.

BE WARY OF BUYING A BRAND NEW HOUSE IN A NEW DEVELOPMENT. One of the riskiest types of homes to buy is a brand new house in a new development. It might be a bargain. Or it could be an overpriced “turkey.” The reason is nobody knows how the development will turn out. It could be terrific. Or, it might be a ghost town if few other homes are sold. Worse yet, the developer might decide to “downsize” and build less-expensive homes nearby. The worst example of this situation I’ve seen is the well-known “Heathrow” subdivision just north of Orlando. It was planned to be a very upscale community. However, the luxury homes in this gated community weren’t selling. So the developer started building townhouses and condominiums nearby the expensive grand homes. I’ll bet those buyers of the fancy luxury houses aren’t too happy having town homes and condos in their neighborhood.

ASK ABOUT HOME WARRANTIES. Whether you buy a brand new or a resale residence, ask about home warranties. Most builders of brand new homes warranty their residences for at least 12 months. The best homebuilders provide 10-year warranty policies from independent third party warranty companies. If the builder doesn’t provide such a warranty, ask for the locations of the builder’s previous developments. Drive around them to see how they turned out. Knock on a few doors to learn if the homebuyers were happy with the builder’s after-sale service. Every new home has defects, but what matters is how the builder handles them.

When buying a resale home, insist on obtaining a one-year home warranty policy. Many home sellers or their listing agents will gladly pay the basic cost of around $300, as a sales inducement. The reason is these policies prevent lawsuits by paying for repairs to plumbing, wiring, furnace (air conditioning usually costs extra), and built-in appliances. For an additional premium, you can usually include the roof, plumbing outside the house’s perimeter, swimming pool, air conditioning, and other potential problems. These policies are usually available through realty agents and title insurance companies.

A FINAL SUGGESTION: When buying a house or condo, ask yourself “Is this where I want to spend the rest of my life (or at least the next five years)?” If it isn’t, don’t buy. Should you have any questions about the legal aspects of your home purchase, don’t hesitate to make your purchase offer contingent on the approval of your real estate attorney within two days (however, this might cause your purchase offer to be rejected by the seller if the local home sales market is very competitive). More details on how to avoid being ripped off when buying your next home are in these special reports: #02330 “Mistakes to Avoid Why Buying a Condo (or Co-op),” #00305 “How to Avoid Buying (or Selling) A Bad House,” and #01317 “How to Use Successful Negotiation Tactics for Your Next Home or Investment Property Sale or Purchase.”

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