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Buying a Home
What does a buyer need to do before making a purchase offer?
Even before starting to look at houses, find out what price house or condominium you can afford, says syndicated columnist Dian Hymer. Roughly speaking, Hymer says you can afford to buy a
home equal in price to three times your gross annual income. More precisely, the price you can afford to pay for a home will depend on six factors:
- your income
- the amount of cash you have available for the down payment, closing costs and cash reserves required by the lender
- your outstanding debts
- your credit history
- the type of mortgage you select
- current interest rates
Lenders also analyze your income in relation to your projected cost of home ownership and outstanding debts to determine the size loan you can have. Hymer says your housing
expense-to-income ratio is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes
and hazard insurance. The sum of these costs is referred to as "PITI." Monthly homeowners' association dues, if you're purchasing a condominium or townhouse, and
private mortgage insurance are added to the PITI. Your housing expense-to-income ratio should fall in the 28 to 33 percent range, although some
lenders will go higher under certain circumstances. Your total debt-to -income ratio should be in the 34 to 38 percent range.
Explain the difference between market value and appraised value.
An appraisal is "an estimate of a property's monetary value on the open market; an estimate of a property's type and condition, its utility for a given purpose or its highest and best use,"
according to Charles O. Stapleton, III, Thomas Moran and Martha R. Williams, authors of "California Real Estate Principles," 3rd Edition, Dearborn Financial Publishing, Inc., Chicago, 1994.
Comparative market analysis is an informal estimate of market value performed by a real estate agent or broker. It is based on like sales and generally offers a range of values including probable market value.
How can someone find out how much a house is worth?
People traditionally turn to either an appraisal or a comparative market analysis (CMA) when determining a property's value.
An appraisal is an expert's "estimate of a property's monetary value on the open market; an estimate of a property's type and condition, its utility for a given purpose or its highest and best use." The results can be presented to the client in various ways ranging from a brief summary on a preprinted form, to a more thorough narrative appraisal report showing all factual materials,
techniques and appraisal methods used in setting forth the appraisers conclusion of value, or as a letter of opinion simply giving only the appraiser's conclusion of value, with no supporting
data, Stapleton, Moran and Williams write. A comparative market analysis is an informal estimate of market value performed by a real
estate agent or broker. Many agents offer a free analysis or property profile in hopes of acquiring a new client.
What's the difference between the list price, appraisal price and sales price?
A seller's advertised or list price should be treated as only a rough estimate of what he or she would like to receive. Some deliberately overprice, while others ask for close to what they hope
to get and a few actually underprice their houses with hopes that potential buyers will compete and overbid, according to the book, How to Buy a House in California.
The appraisal price is another estimate of value. The appraised price is how much money a professional appraiser estimates the home to be worth and usually is based on "comps," or sales
of comparable homes in the same area. Purchase price and sales price are the same thing. Both terms mean the amount of money the successful buyer actually pays out to purchase the home. 
Finding the Right Home
Does it make more sense to add on to a house or buy a new one? Homeowners should consider several questions before making a choice between adding on to an
existing home or moving up in the market to a bigger house.
- How much money is available, either from cash reserves or through a home improvement loan, to remodel the current house?
- How much additional space is required? Would the foundation support a second floor or does the lot have room to expand on the ground level?
- What do local zoning and building ordinances permit?
- How much equity already exists in the property?
- Are there affordable properties for sale that would satisfy housing needs?
Ultimately, the decision should be based on individual needs, the extent of work involved and what will add the most value.
According to the "Cost vs. Value Report," published annually by Remodeling Magazine, "State-of-the art kitchens excite buyers, as do graceful, quality-conscious bathrooms."
Among the hottest improvement projects in 1993 were family room remodels and master bed-bath suites. Growing families made bedroom additions more popular than ever, the report states.
Also, consider limitations of your neighborhood, It makes more sense to add on to the smallest house than to further improve the largest one in the area.
"And when trying to decide what type of addition offers the best payback, don't hesitate to play follow the leader: If others in the neighborhood have added family rooms or bedroom wings, it's
probably safe for you as well," Remodeling reports. Resource: "The Do-able Renewable Home," a free booklet available from the American
Association of Retired Persons; Fulfillment Department; 601 E St., NW; Washington, DC 20049.
I am thinking about buying a condominium. How much do I need to know about the homeowners association?
Learn everything you can about the association before you purchase a condo. The financial, political and legal condition of the homeowners association is very important to your investment and quality of life. When run properly, homeowners associations maintain the common grounds and keep civility in the condo complex. If you follow the rules, the association should not intrude on your privacy
or cost you too much in association dues. Poorly managed associations can drag down property values and make living there difficult for residents.
Start by studying the Covenants, Codes and Restrictions of the association, referred to as CC&Rs, and find out if you can live by them. For example, if the rules prohibit loud music after a
certain hour and you like to play your Cd's late at night, this may not be the place for you. Don't move in thinking you can get away with violating the rules or change them later because you
may find yourself in turmoil with determined neighbors who are firmly in control of the association board. Find out all you can about the association's finances. Beyond reviewing the budget, talk to the
association treasurer and find out if dues are expected to increase and if any special assessments are planned. Ask if special inspections have revealed problems with roofs or
plumbing that may cause a dues hike or special assessment later on. Call and meet with the association president. If you are the type of person who despises
intrusions into your private life and the president seems more interested in gossip about the residents than maintaining the property, this may not be the right condo complex for you.
Speak with residents to get their views on the association's finances, its property manager, how it operates and any politics. Associations are volunteer organizations with elected boards, like a
mini-government, politics can enter the picture and spoil a good thing. Lastly, take some time to understand how homeowners associations are organized and how they
conduct business. Like all real estate investments, the more you know the better off you are.
We found a house we really want to buy and are ready to make an offer. But what if the inspectors find something wrong with it?
Home buyers can protect themselves by including an "inspection contingency" in their purchase offer, which will allow them to cancel closing on the deal if an inspector finds problems with the property. As soon as the seller accepts a written offer, the document becomes a legally binding contract, subject to review by an attorney in certain areas. It supersedes any previous oral agreements, so
be sure it contains clear references to any promises made by either party during negotiations. The purchase contract could be written to include a contingency for any repairs found to be
needed or related items the seller must take care of before closing. If these are not attended to, the buyer could hold the right to delay or possibly cancel the closing. Otherwise, buyers face
losing their deposit. There also may be costly legal implication stemming from backing out of a contract. The buyer usually has the right to choose the inspector and also is responsible for paying for
the inspections. In addition to an overall inspection for structural soundness, buyers can request a satisfactory pest control inspection report, roof inspection report or contingency for no
potential environmental hazards such as asbestos or radon gas. Contingency clauses should satisfy the concerns of both the buyer and seller. Buyers can also
protect themselves by inserting additional necessary contingencies. Indicate which items like curtains and appliances are to remain with the house. Then stipulate you have the right to
personally inspect the home 24 hours before closing to make sure all is in order.
Home Inspections
How can someone find a competent home inspector? Inquire of the: American Society of Home Inspectors; 1735 N.Lynn St.; Suite 950; Arlington, Va. 22209
How can someone with no mechanical aptitude obtain a qualified, independent, trustworthy home construction inspector?
One can usually find an inspector by looking in the phone book or by inquiring at a real estate office or sometimes at an area Realtor association.
Rates for the service vary greatly. Many inspectors charge about $400, but costs go up with the scope of inspection.
Tax Considerations
What expenses beyond the mortgage interest are tax deductible?
"Points paid by the buyer are deductible for that year," say Edith Lank and Miriam S. Geisman, authors of Your Home as a Tax Shelter,
Dearborn Financial Publishing, Chicago, 1993. In a new ruling by the IRS, even points paid by the seller are deductible.
According to Lank and Geisman, not a lot of other fees are immediately tax deductible, but some may be figured into the adjusted cost basis of your home, an important figure when people
ultimately calculate capital gains. "When you buy your home, you have closing expenses, many listed on your settlement
statement, that are not deductible on your income tax return, but, instead, simply are added to your cost basis for the property," Lank and Geisman say.
"If you haven't yet purchased your home, a look at the following list could frighten you away from the project forever! Any of these expenses you may encounter cannot be used as income tax
deductions; add them to your basis: title insurance, loan-application fee, credit report, appraisal fee, service fee, settlement or closing fees, bank attorney's fee, attorney's fee, document
preparation fee and recording fees," the authors say. We recommend that you consult a tax advisor to be safe.
The seller paid the points on this home. Are these deductible from income taxes?
Home owners affected by the IRS'1995 announcement allowing buyers to deduct points paid by the seller are instructed to file an amended tax return for the year in which the home was purchased,
"If they're entitled to a refund, they will get a refund based on the filing of an amended return," said Pam MacLean, assistant public affairs officer with the IRS office in Oakland, CA.
The amendment form, called 1040X, can be ordered by calling the IRS directly at 1-800-TAX-FORM.
At the top of the form,write "seller paid points," MacLean says. Form instructions tell people to attach a copy of their settlement statement, commonly called the HUD-1 form.
The IRS announced in mid-March that people who purchase homes after Dec. 31, 1990 could deduct points paid by the seller. This deduction previously was reserved only for points actually paid by the buyer.
However, MacLean said many deals between buyers and sellers were taking place outside of escrow. Some buyers were paying the points but could not take credit for it because the seller
wanted to use the deduction to reduce capital gains. "The IRS made the change so it would be the same no matter how people were doing it- it would be the same for everybody," MacLean said.
How can a seller avoid paying capital gains taxes?
In considering capital gains tax from the sale of a primary residence, the critical time frame is tow years. Generally, the capital gain is the difference between he original sales price, capital
improvements and some closing costs and the eventual sales price. Tax on the gain may be deferred if the sellers buy another home of equal or greater value within 24 months
People over 55 can qualify for a one-time capital gains exemption of $125,000. Real estate writers Edith Lank and Miriam S. Geisman, authors of Your Home as a Tax Shelter,
Dearborn Financial Publishing, Inc., Chicago, 1993, say "the IRS allows homeowners to add the price of improvements to the cost basis for their property to arrive at an important figure known
as the adjusted cost basis." Lank and Geisman say "gains tax is not forgiven forever; it simply is postponed until the nest
home is sold. At that pint, it often is postponed again in the same manner, piling up untaxed profit on a string of homes."
What kinds of IRS publications will help in calculating taxes? We recommend that you consult a tax advisor to be safe. Refer to the following IRS Publications:
521 Moving Expenses
523 Selling Your Home
527 Residential Rental Property
534 Depreciation
541 Tax Information on Partnerships
551 Basis of Assets
555 Federal Tax Information on Community Property
561 Determining the Value of Donated Property
590 Individual Retirement Arrangements
908 Bankruptcy and Other Debt Cancellation
936 Home Mortgage Interest Deduction Order by calling 1-800-TAX_FORM.
How can someone reach an IRS representative directly? Call 1-800-TAX-1040.
IRS Real Estate-related Publications
21 Moving Expenses
523 Selling Your Home
527 Residental Rental Property
534 Depreciation
541 Tax Information on Partnerships
551 Basis of Assets
555 Federal Tax Information on Community Property
561 Determining the Value of Donated Property
590 Individual Retirement Arrangements
908 Bankruptcy and Other Debt Cancellation
936 Home Mortgage Interest Deduction Order by calling 1-800-TAX_FORM
Making an Offer
Is it true only offers close to the selling price will be accepted? "There are always some sellers who for some reason must sell quickly, writes William H.
Pivar, author of "Real Estate Investing From A to Z," Probus Publishing, Chicago, Ill., 1993. "While a very low offer in a normal market might be rejected immediately, in a buyer's market
the below-market offer will usually either be accepted or generate a counteroffer. When few offers are being made, an outright rejection of offers becomes unlikely."
While it is true that offers at or above full price are more likely to be accepted by the seller, there are other considerations involved.
Is the offer contingent upon anything such as the sale of the buyer's current house? If so, such an offer, even at full price, may not be as attractive as an offer without that condition. Is the offer
made on the house : "as is," or does the buyer want the seller to make some repairs before close of escrow or make a price concession instead?
Is the offer all cash, meaning the buyer has waived the financing contingency? If so, then an offer at less than the asking price may be more attractive to the seller than a full-price offer
with a financing contingency.
Estimated Closing Costs
These are estimated, approximate New Jersey settlement costs for use as a guideline only.
Title Search
One time charge, based on sales price of property, insures the lender against title defects. Required by lender Title endorsement None required
Survey endorsement $20.00Owners Policy for Title Insurance Recommended
Title Search $150 - $400.00
Fire Insurance Amount of Mortgage, at least. 1 yr.paid in full
Generally part of Homeowners policy. 2 mos. escrow
may be required
Flood Insurance If required, check with 1 yr. paid in full
insurance agent 2 mos. escrow poss.
Flood Certificate (if required) $20.00 fee
Transfer Tax
Based on sales price Not paid by buyer
Real Estate Property Tax in Escrow
NJ taxes are paid quarterly 3-4 months at settlement,
per diem to seller for prepayment
Survey
Lower rate if same surveyor recently
had surveyed property $200 - $1,000
Mortgage Application Fee
Credit report, property appraisal,
processing fee $200 - $400.00
Mortgage Origination Fee and Points
Origination point, or part may be
collected on application. Remainder at 1 - 4% of
settlement. Some of this may be tax Mortgage amt.
deductible as interest in advance generally
Private Mortgage Insurance If loan is for more than 80%,
premium paid on loan to value and
determined by lender Check with lender
Recording Fees
Deed and Mortgage filed in County Court House $40 - $80.00
Inspections Insect Infestation $50.00 up
Engineering $150 - $400.00Water Potability (well) $25 - $50.00
Radon $50 - $150.00
Attorney's Fee Not required, but advised. $475 - $1,000
Attorney's Review Fee
May be levied by lender if attorney
is not a bank attorney $100 - $200
Miscellaneous
Reimbursement for fuel oil, conveying by
broker. Notary By adjustmentSource: Relocation Quarterly
Example of Buyer Closing Costs *These estimates are purely for illustration purposes only. The estimated costs are based upon
a minimum of 20% down payment on a home purchase in central New Jersey and a $150,000. mortgage amount.
Mortgage Application Fee $300.00
Points (0-3 pts.) ($0-$4500)
Appraisal 225.00
Credit Report 25.00
Attorney's Fee 750.00
Recording Fee 50.00
Title Insurance 800.00
Termite & Radon Inspections 400.00
Survey 350.00
Prepaid/Escrow Items
Homeowners Insurance (One Year) $480.00
Homeowners Insurance Escrow (2 months) 80.00
Tax Escrow (Three Months) 1060.00
Perdiem Interest (1-30 Days) 100.00Source: The Home Mortgage Network
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